Because the recession is over, you just don't know it yet!
Medicine One
Blue Pill
Red Pill
Monday, December 6, 2010
Sunday, December 5, 2010
How Property Taxes Undermine Housing Prices
It snowed about 8 inches here in the Twin Cities this weekend. Normally this would upset people, but I enjoy it. And the reason I enjoy it is because when it snows like this I am happily reminded of the fact I no longer have to drive to Minneapolis to shovel my duplex.
It's the same feeling I get when it's late in fall and the leaves are on the ground. I no longer have to drive to my duplex in Minneapolis to rake the yard. I just mow over what few leaves fall on my new yard in the burbs.
Of course these are seasonal feelings. I get about a weekly dose of "post-partem-von-Minneapolis" happiness when I have to drive through the town and pass the Riverside exit knowing full well I never have to take that exit ever again to deal with my former rental property be it tenants, mice, or just general maintenance problems.
But the biggest smile on my face is when I look at my property tax bill and see that in my current abode (which is a nicer property and in a nicer neighborhood) I pay literally 1/4th the property taxes I did in Minneapolis. Not to mention I have much better schools, police, public services and plowing service (and I have yet to have my car stolen!).
Regardless, the snow this latest time around got me thinking about another aspect of my former place in Minneapolis and that was whether or not home prices were coming down enough to rationalize investing in my old neighborhood once again. To do this we need to take a look at that old standard classic ratio;
House price to rents.
There are varying measures or ways to do this, but they all measure the same thing - how much of a multiple of rents is the price of the house.
It is identical to the P/E ratio of stocks. The idea being a low ratio shows you, you are getting a lot of rent for a relatively low price. A high ratio shows you the rent is likely NOT worth the cost of the house.
I pulled figures from 2001 (most available) to the present using the "fair market rents" for a one bedroom apartment in the Twin Cities area and the median sales price from the Minneapolis Area Association of Realtors and came up with the blue line.
And what do you know, it looks like the bubble is finally over, hallelujah! Price to rents was originally about 26, reaching a peak of 32 and now because of the crash, back down all the way below 20! Certainly a deal!
But what has your old wise Captain been telling you about the biggest largest threat to the recovery of the housing sector, especially in big cities?
That's right, property taxes.
You see, charge all the rent you want, you don't get to keep all of it. You have to pay for insurance, interest and repairs. These things (bar having an ARM as a means of financing your house) stay relatively stable. But there is one thing that you pay every month and has a tendency to go up.
Property taxes.
I remember when I first bought my house my property taxes were just $1,100. Ten years later they were over $4,000. Certainly more than the rate of inflation.
Now I know property taxes figure in lastly when most people buy a house, but please listen to me.
Property is nothing more than an asset. Assets only have value if they have some means of feasible cash flow. This is why you compare a stock price versus it's earnings. Or a mutual fund against its dividends. And a house against its rents.
However, if you are going to buy any one of these assets, keep in mind you don't get to keep all the profits they generate. You have to pay taxes to various governments on various assets. And if the taxes on those cash flows goes up, it directly and negatively affects the value of that asset, driving asset prices down.
Thus, the red line.
The red line is much more representative of the true over/undervaluation of properties in the MInneapolis area. It takes out the average property taxes one pays (no historical data was at the Minneapolis city's web site so I used my own as a proxy) and then applies the price of the house to NET rents (rental income after property taxes).
The trend is a little bit different.
The ratio started at 30, went up to 50, and then back down to 30. Meaning housing is no more of a deal today than it was in 2001. Why? well prices are actually lower today than they were in 2001 (by about $30,000), so how did the ratio not drop as much as its gross rent counterpart?
Those wonderful property taxes.
When you account for property taxes, you're still buying into a bubble. A house isn't worth a ratio of 30 times annual net rental income. You can find a lot cheaper (and safer and better and lower taxes and etc. etc.) in the burbs.
But this also has ramifications for the appraisal and collateral based industries. REIT's heavily invested in major cities, banks with overexposed real estate portfolios in major cities (or any heavily taxed city) and hedge funds chomping at the bit to take positions in real estate hoping to buy at the bottom better pay close attention to net rental rates and not gross.
Of course if they have even the slightest bit savvy of models (or analysts) their calculations will account for net rent. However, it's not that as much as it is the perpetually increasing chunk property taxes take out of rents. Using my property taxes as a historical proxy against the FMR in Minneapolis, property taxes were originally just 14% the rent I could get from the available unit. Now it's 42%.
(technical note - this is for a duplex, so the above chart could be halved if one were to consider renting out the additional unit for rent, doubling the rent instead of living in it)
Regardless of whether the unit is rented or not, the issue is the perpetually increasing property taxes relative to the rents. As property taxes take more and more profit from the property, that property will continue to have less and less value. So the issue is not one of what property taxes are today. It's what they are going to be in the future. And given the ilk on the Minneapolis City council, you can expect all rents to be consumed by property taxes by ehhh, roughly 2030/2035ish or so.
Enjoy the decline!
It's the same feeling I get when it's late in fall and the leaves are on the ground. I no longer have to drive to my duplex in Minneapolis to rake the yard. I just mow over what few leaves fall on my new yard in the burbs.
Of course these are seasonal feelings. I get about a weekly dose of "post-partem-von-Minneapolis" happiness when I have to drive through the town and pass the Riverside exit knowing full well I never have to take that exit ever again to deal with my former rental property be it tenants, mice, or just general maintenance problems.
But the biggest smile on my face is when I look at my property tax bill and see that in my current abode (which is a nicer property and in a nicer neighborhood) I pay literally 1/4th the property taxes I did in Minneapolis. Not to mention I have much better schools, police, public services and plowing service (and I have yet to have my car stolen!).
Regardless, the snow this latest time around got me thinking about another aspect of my former place in Minneapolis and that was whether or not home prices were coming down enough to rationalize investing in my old neighborhood once again. To do this we need to take a look at that old standard classic ratio;
House price to rents.
There are varying measures or ways to do this, but they all measure the same thing - how much of a multiple of rents is the price of the house.
It is identical to the P/E ratio of stocks. The idea being a low ratio shows you, you are getting a lot of rent for a relatively low price. A high ratio shows you the rent is likely NOT worth the cost of the house.
I pulled figures from 2001 (most available) to the present using the "fair market rents" for a one bedroom apartment in the Twin Cities area and the median sales price from the Minneapolis Area Association of Realtors and came up with the blue line.
And what do you know, it looks like the bubble is finally over, hallelujah! Price to rents was originally about 26, reaching a peak of 32 and now because of the crash, back down all the way below 20! Certainly a deal!
But what has your old wise Captain been telling you about the biggest largest threat to the recovery of the housing sector, especially in big cities?
That's right, property taxes.
You see, charge all the rent you want, you don't get to keep all of it. You have to pay for insurance, interest and repairs. These things (bar having an ARM as a means of financing your house) stay relatively stable. But there is one thing that you pay every month and has a tendency to go up.
Property taxes.
I remember when I first bought my house my property taxes were just $1,100. Ten years later they were over $4,000. Certainly more than the rate of inflation.
Now I know property taxes figure in lastly when most people buy a house, but please listen to me.
Property is nothing more than an asset. Assets only have value if they have some means of feasible cash flow. This is why you compare a stock price versus it's earnings. Or a mutual fund against its dividends. And a house against its rents.
However, if you are going to buy any one of these assets, keep in mind you don't get to keep all the profits they generate. You have to pay taxes to various governments on various assets. And if the taxes on those cash flows goes up, it directly and negatively affects the value of that asset, driving asset prices down.
Thus, the red line.
The red line is much more representative of the true over/undervaluation of properties in the MInneapolis area. It takes out the average property taxes one pays (no historical data was at the Minneapolis city's web site so I used my own as a proxy) and then applies the price of the house to NET rents (rental income after property taxes).
The trend is a little bit different.
The ratio started at 30, went up to 50, and then back down to 30. Meaning housing is no more of a deal today than it was in 2001. Why? well prices are actually lower today than they were in 2001 (by about $30,000), so how did the ratio not drop as much as its gross rent counterpart?
Those wonderful property taxes.
When you account for property taxes, you're still buying into a bubble. A house isn't worth a ratio of 30 times annual net rental income. You can find a lot cheaper (and safer and better and lower taxes and etc. etc.) in the burbs.
But this also has ramifications for the appraisal and collateral based industries. REIT's heavily invested in major cities, banks with overexposed real estate portfolios in major cities (or any heavily taxed city) and hedge funds chomping at the bit to take positions in real estate hoping to buy at the bottom better pay close attention to net rental rates and not gross.
Of course if they have even the slightest bit savvy of models (or analysts) their calculations will account for net rent. However, it's not that as much as it is the perpetually increasing chunk property taxes take out of rents. Using my property taxes as a historical proxy against the FMR in Minneapolis, property taxes were originally just 14% the rent I could get from the available unit. Now it's 42%.
(technical note - this is for a duplex, so the above chart could be halved if one were to consider renting out the additional unit for rent, doubling the rent instead of living in it)
Regardless of whether the unit is rented or not, the issue is the perpetually increasing property taxes relative to the rents. As property taxes take more and more profit from the property, that property will continue to have less and less value. So the issue is not one of what property taxes are today. It's what they are going to be in the future. And given the ilk on the Minneapolis City council, you can expect all rents to be consumed by property taxes by ehhh, roughly 2030/2035ish or so.
Enjoy the decline!
She Did NOT Get "Hit By a Truck"
I was accidentally eavesdropping on a cell phone conversation at a cigar lounge I was at recently. It was a young kid (20 something man) talking to either a female friend or his mother (I could not tell which). And far as I could tell he was trying to figure out why a girl who had agreed to go out with him at the last minute the night before canceled. I could not hear what the other person was saying, but the conversation went something like;
Boy - "Well she said she wanted to go out, but when I called her, she didn't pick up. I tried texting, but she didn't respond either."
Person on other line - "Well maybe she was sick"
Boy - "Well yeah, but if she was sick the least should could do would be to text me back saying so."
Person on the other line - "Well there could have been an emergency of some kind. Maybe she's just really busy and hasn't been able to get back to you."
Boy - "How busy can you be to not call somebody for 4 seconds to tell them you're not able to go out?"
The conversation went on, but I needed not eavesdrop anymore because I could already finish the conversation myself. Regardless, it showed me there is a vital and necessary lesson needed to be passed on to the younger Cappy Capites of the male persuasion about the fairer sex, so please take out your note books and pencils and take note.
1. She was not "sick" or "in the emergency room" or "really busy." She just plain didn't want to go out with you.
Understand that women in their 20's and late teens will say yes to avoid the hardship of telling you no. Of course when it comes time to actually show up for the date, then they will bail and just not return any calls that could lead towards a cementing of a time or a place you pick them up. This is why the Rule of 505025 exists (look it up, I won't link to it).
2. How did I know the person on the other line was a girl? Because only women will go to great lengths to rationalize what is empirically and obviously a rejection. They will always try to make you feel better, even though deep down inside they know you just got stood up. Ergo the "well, maybe she got sick." Or " Well, maybe she's just really busy." Or, "Well, maybe she just forgot. You know, people with their busy schedules and all."
Honest to truth when I was a youth in college and had a similar such conversation with my mother she said in ALL SERIOUSNESS (no sarcasm intended) "Well, maybe she got hit by a truck and is in the hospital. You never know!"
Actually, you do, because I'm telling you now.
In every case, no matter what the excuse, the rationalization, explanation or theory, in the end the girl just plain didn't want to go out with you.
Now you have a choice. You can waste your time worrying about it, worse still you can somehow think it reflects upon you personally, or you can follow the Ole Captain's simple rule;
"The Why Doesn't Matter, All that Matters is What IS."
In short, what matters is the reality of the situation - she didn't show up.
You can rack your brain and burn out a 100 terraflop supercomputer trying to figure out the reason and rationalization "why she didn't show up," but in the end all the matters is you wasted your Friday night thinking you had a date. Not to mention calories of energy trying to figure out why she didn't show up.
And to come up with and opine about outlandishly pathetic excuses for her standing you up is foolish and frankly, self-DISrespecting.
Many a man has wasted untold amounts of time, psychological energy and fret/worrying about the "why she didn't show up" when the "why she didn't show up" doesn't matter (and should be self-evident). All that matters is what IS. And that "is" "is that she didn't show up."
The poor guy got stood up and instead of wasting time worrying about it he should instead just simply realize that he got stood up and move on. Perhaps next time being sure to have a back up plan and CERTAINLY NOT put any hope or faith in the fact he "might" have date the next time a girl agrees to go out.
Therefore men (of the younger Cappy Cappite persuasion), save yourself a LOT of stress and learn from the old man's experiences. Realize she didn't not get hit by a truck. She didn't forget to call. Her cell phone was not "not charged." And she was not abducted by aliens. Please have some self-respect, accept the fact she flaked, move on and hold your head higher with a little bit more dignity and simply remember that the next time a girl says "yes" to a date to have a back up plan, if not, fully plan on doing something else that night.
This has a been a public service announcement to the 20 Something Male Capposphere.
Boy - "Well she said she wanted to go out, but when I called her, she didn't pick up. I tried texting, but she didn't respond either."
Person on other line - "Well maybe she was sick"
Boy - "Well yeah, but if she was sick the least should could do would be to text me back saying so."
Person on the other line - "Well there could have been an emergency of some kind. Maybe she's just really busy and hasn't been able to get back to you."
Boy - "How busy can you be to not call somebody for 4 seconds to tell them you're not able to go out?"
The conversation went on, but I needed not eavesdrop anymore because I could already finish the conversation myself. Regardless, it showed me there is a vital and necessary lesson needed to be passed on to the younger Cappy Capites of the male persuasion about the fairer sex, so please take out your note books and pencils and take note.
1. She was not "sick" or "in the emergency room" or "really busy." She just plain didn't want to go out with you.
Understand that women in their 20's and late teens will say yes to avoid the hardship of telling you no. Of course when it comes time to actually show up for the date, then they will bail and just not return any calls that could lead towards a cementing of a time or a place you pick them up. This is why the Rule of 505025 exists (look it up, I won't link to it).
2. How did I know the person on the other line was a girl? Because only women will go to great lengths to rationalize what is empirically and obviously a rejection. They will always try to make you feel better, even though deep down inside they know you just got stood up. Ergo the "well, maybe she got sick." Or " Well, maybe she's just really busy." Or, "Well, maybe she just forgot. You know, people with their busy schedules and all."
Honest to truth when I was a youth in college and had a similar such conversation with my mother she said in ALL SERIOUSNESS (no sarcasm intended) "Well, maybe she got hit by a truck and is in the hospital. You never know!"
Actually, you do, because I'm telling you now.
In every case, no matter what the excuse, the rationalization, explanation or theory, in the end the girl just plain didn't want to go out with you.
Now you have a choice. You can waste your time worrying about it, worse still you can somehow think it reflects upon you personally, or you can follow the Ole Captain's simple rule;
"The Why Doesn't Matter, All that Matters is What IS."
In short, what matters is the reality of the situation - she didn't show up.
You can rack your brain and burn out a 100 terraflop supercomputer trying to figure out the reason and rationalization "why she didn't show up," but in the end all the matters is you wasted your Friday night thinking you had a date. Not to mention calories of energy trying to figure out why she didn't show up.
And to come up with and opine about outlandishly pathetic excuses for her standing you up is foolish and frankly, self-DISrespecting.
Many a man has wasted untold amounts of time, psychological energy and fret/worrying about the "why she didn't show up" when the "why she didn't show up" doesn't matter (and should be self-evident). All that matters is what IS. And that "is" "is that she didn't show up."
The poor guy got stood up and instead of wasting time worrying about it he should instead just simply realize that he got stood up and move on. Perhaps next time being sure to have a back up plan and CERTAINLY NOT put any hope or faith in the fact he "might" have date the next time a girl agrees to go out.
Therefore men (of the younger Cappy Cappite persuasion), save yourself a LOT of stress and learn from the old man's experiences. Realize she didn't not get hit by a truck. She didn't forget to call. Her cell phone was not "not charged." And she was not abducted by aliens. Please have some self-respect, accept the fact she flaked, move on and hold your head higher with a little bit more dignity and simply remember that the next time a girl says "yes" to a date to have a back up plan, if not, fully plan on doing something else that night.
This has a been a public service announcement to the 20 Something Male Capposphere.
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