Higher Taxes, Fewer Services In Subprime Meltdown's Wake

Municipal ledger hounds are worried that local governments will slash services as the imploding housing market chokes off access to lucrative property tax revenue. The New York Times visited the future retirement destination of its readers, South Florida, to see firsthand the devastating affect the subprime meltdown can have on communities. For anyone who says “What housing crash, my community is fine,” hop across the jump for a look at your potential future.

While speculators may find it easy enough to pack up and move on, they are leaving behind an empire of vacant houses that will not be easily sold. More than 19,000 single-family homes and condos are now listed on the market in Lee County. Fewer than 500 sold in November, meaning that at the current rate it would take three years for the market to absorb all the houses.

“Confusion abounds because nobody knows where the bottom is,” says Gerard Marino, a commercial Realtor at the Re/Max Realty Group in Fort Myers.

Commercial builders are unloading properties at sharply reduced prices, sometimes even below construction costs, which further adds to the glut.

“It’s our goal to clear out the inventory,” James P. Dietz, the chief financial officer of WCI Communities, a Florida-based home builder, said in an interview two weeks ago. “We have to generate cash to make payroll.” Last week, Mr. Dietz announced he would leave WCI at the end of this year to pursue a career in the vacation resort business.

AT Pelican Preserve, a gated community set around a 27-hole golf course in Fort Myers, WCI has halted building, leaving some residents staring at mounds of earth where they expected to see manicured lawns. Half-built condos sit isolated in a patch of dirt, cut off from the road.

“It bugs the hell out of my wife,” says Paul Bliss, 61, whose three-bedroom town house is next to a half-built home site. “She looks out and sees that concrete slab.”

But the builder makes no apologies. “There was such a falloff in demand that it made no sense to build new units,” says Mr. Dietz, adding that the pause in construction “doesn’t in any way detract from the property.”

The hell it doesn’t. We paddle-boated over to a half-finished WCI development over Thanksgiving. It was a creepy Floridian version of I Am Legend. Everything was there—perimeter roads, basic plumbing—everything except the houses. Weed-filled plots stood idly next to lush golf courses fronted by occupied luxury homes.

The imploding housing market is currently hurting unprepared borrowers, but will soon impact everyone by blowing holes in municipal budgets, which derive a third of their revenue from property taxes.

…local officials counter that they are already being forced to contemplate significant changes that could affect everyday life. The county’s public safety division, which operates ambulance services, says it could be obliged to cut staff. The county’s Natural Resources Department recently delayed a $2.1 million project to filter polluted runoff spilling into the Lakes Regional Park — a former quarry turned into a waterway dotted by islands and frequented by native waterfowl.

People who were priced out of the earlier boom here could wind up the winners. “We had an affordable-housing crisis,” says Tammy Hall, a Lee County commissioner. “The people who were here for a fast buck are gone. You’re going to see normal people go back into that housing.”

Anti-government advocates are cheering the crash, arguing that governments “drunk on money” must accept their dole and reduce services. Municipalities are the secondary victim, the foreman who gets a paper cut handing over a jury’s death sentence. Local government collects garbage and library books, not rights and liberties. The subprime meltdown may present itself to the rest of us as a familiar but painful choice: higher taxes or fewer services.

This Is the Sound of a Bubble Bursting [NYT]

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  1. Balentius says:

    Acutally, I would have to agree with the “Anti-government advocates” on this one – I suspect that a lot of local governments were getting the impression that they could do a lot more, without increasing taxes, because of the housing boom. On the one hand, it’s not great that a project like that will be delayed. On the other hand, it is the same problem that most people have – this year, I pay to fix the bathroom, next year I pay for the kitchen, the year after I go on a cruise…

    As far as cutting ambulance service – Once again, local governments like to scare people. Every time there is any budget shortfall, it’s “Oh, we’ll have to fire half our police force”, or other crap like that. Somehow, at the end of the year, the money is found somewhere to keep the unionized police…

    No new story here – because of the housing bust, there is less revenue being collected. Oh, well.

    (Of course, I live in the Portland, OR metro area, where house prices still increased over the last 6 months…)

  2. rbb says:

    I am glad the local governments are getting a wake up call. I am sick of my property tax bill increasing 15-20% every year for the last 5 or six years when my pay raises only amounted to 5% or less. It’s sad that every time I refinanced to get a better rate, the savings have gone to pay the property tax bill increases.

    Why should they get such a pay raise? And of course, they went out and spent the extra money with no thought to what the future might bring. Time to cut the budget.

  3. darkened says:

    I agree while I’m not outright cheering. I believe is a global good and the USA will be a better place after it finally resolves. Hopefully correcting home prices to median incomes where they belong so a working family can buy a home correctly.

  4. darkened says:

    In regards to property tax, I believe that is most likely the most unamerican thing ever invented, only possibly a close second or first to income tax.

  5. Falconfire says:

    The biggest problem you get though is either the public pays for this stuff, or no one does it.

    No one does anything for free these days. If local governments stopped paying for police and fire, and people started volunteering for it, watch how fast everyone in your town moves out and the criminal element moves in. For small towns it may be fine, but for major cities your asking for a repeat of the 70’s, which funny enough is the last time this mess happened.

  6. noquarter says:

    I’m confused about how a drop in expected home sales, as this summary focused on, could lead to reduced tax incomes for local governments.

    If the governments had planned on those homes selling and stupidly budgeted as though they already had sold, that’s very different from having tax revenues reduced.

  7. SadSam says:

    I live in So. Fla. so I can confirm my local govs. (city and county and cities close by) have been spending money like druken sailors. Instead of reducing the millage rate as assessed values doubled between 2001 and 2005 they doubled/tripled their tax collections and now claim they can’t govern on less. Since I lived in So. Fla. pre 2001 I can also confirm that my local town had no trouble picking up my garbage, paying the police/fire fighters and providing other services before 2001. But the $117 million city hall/library complex in West Palm Beach is just one example of recent housing bubble boondoggle spending projects. And Palm Beach County continued to raise taxes in 2006 despite having $900 million in its reserve account.

  8. Balentius says:

    @Falconfire: Agreed – taxes are (painfull as it is to admit it) necessary. However, what I’m (and a lot of other people) objecting to is that as the taxes increased, and the tax revenue increased, the cries got louder from all areas of government about how they were running out of money for vital services, as (for example) they built a new archives building with marble interiors…

  9. noquarter says:

    @SadSam: Exactly.

    What I would like explained by one of these sky-is-falling housing market articles is how anything will be worse off once things settle down than it was before.

    I know that a lot of speculators are going to lose a lot of money, but people who lived in an area before the bubble will continue to live there afterwards. And they’ll continue to pay taxes. And they’ll continue to require the same amount of municipal services they required before. So how is anything going to be any worse once the market “implodes”?

  10. mac-phisto says:

    @Balentius: i always laugh at the suggestions our local gov’t comes up with regarding budget shortfalls. it’s never “delay construction of $2 million sewer extension” & always “cut library staff” (we have 3 librarians that make <$40,000/year…that will certainly make a difference).

    the school directors play even more sinister games (we vote on both the town & school budgets here). when the school budget failed twice a couple years back (20% increase), the directors canned the entire counseling department, after-school activities, special ed & sports. the budget passed by a narrow margin, but then the state stepped in after the vote & arbitrarily increased the budget to reinstate counseling & special ed (lack of counseling & special ed will cost a school their certification).

    so, they circumvented our rights as voters & got away with their increase anyway.

  11. vladthepaler says:

    I wish they would slash services… or at least, slash new construction projects! Local governments seem to think they can do whatever they want and cover it by raising taxes. It’s high time they learn to prioritize, say no once in a while…

  12. Curiosity says:

    @mac-phisto:

    This sort of thing is commonplace in Chicago (and Miami etc.) Note how the govt. there spent all its money on gaining political juice and now there is a problem funding public transportation.

  13. SexCpotatoes says:

    Housepocalypse Now!

  14. Falconfire says:

    @vladthepaler: they slash projects and people bitch, they raise taxes and people bitch.

    Maybe instead of teaching the “local governments” a lesson, you should look at yourself and your neighbors since 99.9% of the problem is residents demands. Maybe if people stopped demanding for so much from their local governments they would stop spending, and thus stop raising taxes.

    Its amazing the mentality of people including some of the posters here. You cant get anything for free, but god forbid you take it away. Taxes may be “un-American” but the simple fact is our revolution was never about taxes… it was about taxation without representation. The founding fathers had no issue with taxes (in fact 6 months after the war they started taxing for services) it was getting taxes levied against us without a seat in parliament.

    The fact is, our country could never survive without some form of taxing. The problem is not the taxes, its the spending. We could stay at our tax level for years if the government knew how to balance it’s check book. But they that means saying no which means people vote them out for “not doing enough”

    and the cycle repeats it’s self.

  15. Curiosity says:

    @Falconfire:
    Perhaps we should require all government officials to master the games Monopoly, Lemonade Stand 2, and Diplomacy?

  16. SoCalGNX says:

    @Falconfire:

    Yes we need to quit demanding things from our local government! On the short list could be police, ER for illegals, repairing potholes and guardrails, removal of downed trees that block roads, having all the government info in spanish, trash pickup except for maybe once a month, street lights, signals, dog catchers could ignore loose pit bulls and quite a few others.

  17. meadandale says:

    The sad thing is that here in San Diego County, assessed property values went from around $200 billion in 2000 to $400 billion this year. You saw the same thing all over the state of California–yet the state has continued to run a deficit year over year in spite of the record property tax revenues.

    Now they are running scared because the day or reckoning is coming and property tax revenues are sure to drop dramatically; however it never occurs to them to stop spending like a drunken sailor.

    I expect that sales tax rates and state income tax rates will be rising shortly, even though they are already some of the highest in the nation.

  18. SirKeats says:

    i’m so screwed. i’m one of the unfortunate souls who scraped enough together to purchase a home, not out of any speculation… but because society kept pounding into me that home-ownership was way better than renting. i purchase a home i could AFFORD (i.e. i only borrowed what i knew i could pay on) but bought at the exact wrong time (at the hight of the boom just before the bubble burst) and will now most certainly be suck in a house worth less than the mortgage on it.

    the development where i live has stalled… and only half the homes have been built. the remaining lots have become weed-choked eyesores… though at this point i suppose i’d rather than than more annoying neighbors! LOL

    in the mean time the govt is bailing out the morons to spent more than they could afford while i, as a responsible “investor” get screwed.

  19. iamme99 says:

    Government always seems to never have enough money. When they are flush, they spend like drunken sailors. When broke, they whine about having to cut services because they didn’t save.

    This short story that many probably read in high school speaks to their never being enough money.

    From:
    THE ROCKING-HORSE WINNER
    by D. H. Lawrence (1926)
    [www.dowse.com]

    Excerpt:
    Although they lived in style, they felt always an anxiety in the house. There was never enough money. The mother had a small income, and the father had a small income, but not nearly enough for the social position which they had to keep up. The father went into town to some office. But though he had good prospects, these prospects never materialised. There was always the grinding sense of the shortage of money, though the style was always kept up.

    At last the mother said: “I will see if I can’t make something.” But she did not know where to begin. She racked her brains, and tried this thing and the other, but could not find anything successful. The failure made deep lines come into her face. Her children were growing up, they would have to go to school. There must be more money, there must be more money. The father, who was always very handsome and expensive in his tastes, seemed as if he never would be able to do anything worth doing. And the mother, who had a great belief in herself, did not succeed any better, and her tastes were just as expensive.

    And so the house came to be haunted by the unspoken phrase: There must be more money! There must be more money! The children could hear it all the time though nobody said it aloud. They heard it at Christmas, when the expensive and splendid toys filled the nursery. Behind the shining modern rocking-horse, behind the smart doll’s house, a voice would start whispering: “There must be more money! There must be more money!” And the children would stop playing, to listen for a moment. They would look into each other’s eyes, to see if they had all heard. And each one saw in the eyes of the other two that they too had heard. “There must be more money! There must be more money!”….

  20. ARP says:

    I don’t think its a local issue only. As you’re all probably aware, its an incredibly complex system of local, state, and federal funding. So, where one source of funding dries up, the other sources raise taxes, fees, etc. to compensate. But with each politician trying to “out tax cut” each other, the buck has to stop somewhere, and its usually local.

    Also local government is much like executive pay. No matter what you try to do to reign it in, it just doesn’t seem to work. This applies to D’s and R’s.

    FYI- all the programs that conservatives hate like, tutoring, school funding, ER care for illegals, putting stuff in two languages, etc. costs a small fraction of our military spending, tax breaks for corporations, funding/tax incentives to the oil companies, etc. We could have solved our oil problem with the money we’ve used in Iraq. Hell, the “unaccounted” money could have rebuilt a majority of our schools.

  21. As a first time home buyer in Tampa, FL I’m really hurting from this tax and insurance craziness. Of course I am not living above my means, but I got my crackhouse right before the market here started to slide. $140k for a ratty 1600sq ft home smack dab in the hood in my attempt to take something ratty and make it nice. I’ve watch my insurance jump from $2300 to $3200 this year and my property taxes jump $900 to $1900! My wife and I got this place to fix up and between bullshit hurricane threats and the county appraisers we have had to put off doing things like painting our home.

    As a libertarian I laugh at myself at times. What a giant waste of emotion/time/money this is turning out to be. I never cared about flipping my home, I just wanted to make it better and help improve my ‘hood. Now I’m slowly being bled to death by greedy govt AND private insurance!

  22. Falconfire says:

    @ARP: dont forget farming subsidies. The simple fact that you could be a total shit farmer yet make 100 grand a year off a acre of land farming corn is offensive.

  23. rbb says:

    @SirKeats: Do some research on what it takes to make a claim on the property around through adverse possession. Then when the market comes around, you may have a bit more land to sell off ;^)

  24. synergy says:

    @curiosity: lol exactly.

  25. synergy says:

    On the other hand, people like me who didn’t buy because we knew the ARMs would reset are starting to shop…

  26. Bunklung says:

    I can only speak for my community/town. But if my town needs money they can raise revenue by 2.5% regardless of the housing prices sinking, say, 10%.

    They can increase revenue by 2.5% over last year’s revenue. So, they can increase the tax rate high enough to make up for the loss in property values. So it’s all a moot point (this article/post). Revenue=tax rate*property values.

    The problem the town faces is not when property values go down, it’s when they need MORE than the 2.5% raise they give themselves each year. Then, they need an override.

    So my town/city is not effected by property value declines and many aren’t.

    When half the town goes bankrupt and defaults on property taxes and the bank fails to pay the escrow… That would be bad news. I don’t see why the town can’t go after the bank for the taxes that go unpaid.

  27. Falconfire says:

    @synergy: I am so glad I didnt buy when my father and father in law bitched at me to. They still wont admit I was right in my decision either.

  28. barty says:

    @SirKeats: Ok, so who is putting a gun to your head to sell it???

    It baffles me why people get so wrapped up in property values when they have no pressing need to sell their home. Ditto with the stock market. If you’re in it for the long term (5+ years in the future) don’t worry over today’s slide in price. Your only worry should be if you bought in an area that was greatly overpriced and prices have corrected themselves to a more sane level. Then you might have some concerns about prices recovering to a point where you don’t have to pay down the mortgage for 10 years before you can sell without having to cut the bank a check.

    We can only hope that this will teach some governments to be a little more fiscally responsible, but I don’t think it will. They’ll still continue to install crosswalks and crossing signals at intersections out in the middle of nowhere (seems to be the favorite thing to do in my area) and install fancy streetlights every 40 feet so you can drive down Main Street at night with your headlights turned off. Until you impose term limits on every elected politician across the country, they’ll continue to spend money like a drunken sailor to kiss up to whatever constituency they think they need to get re-elected for the next 10-15 years.

  29. finite_elephant says:

    Local governments are screwed. Not only will they not be getting revenue from new residential construction, but many will be facing slow or no growth in existing residential property values. This will shine a harsh light on the fact that commercial property values, particularly office and industrial properties, have never really fully recovered from the recession that followed the dot-com bust. Those local governments that are subject to statutory limits on tax rate increases and those with long-term union contracts with automatic COLAs based on the CPI (like most school districts) are going to feel the pain first. It’ll be referendum or no football team.

  30. mac-phisto says:

    @finite_elephant: well, we’re already no football team (basketball team, field hockey team, etc.). that is, the sports are now “pay to play”. great, considering those most in need of the direction, camaraderie & morals that sports participation provide are usually the ones that can afford it least.

    personally, i’m less peeved about the union contracts of the teachers & more pissed that school executives are making more than the nation’s president. one superintendent up here worked 6 months into his 5 year contract before the school board bought it out to the tune of $500,000.

  31. Trai_Dep says:

    To all property owners yammering on (and on and on (and on)) about how unfair (!!) it is to pay taxes for local services, I propose a simple solution.

    Eliminate the mortgage (Fed and local) tax deduction. Nuke it. Begone.

    And we’ll promise to adjust your “unfair” burden accordingly.

    JEEZUS. What a bunch of self-entitled, blinkered whiners.

  32. Trai_Dep says:

    Oh, and, at least for California, keep in mind that while consumers/home owners/renters snipe at each other, it’s the corporate property owners (Exxon and the like), who are sitting pretty. Demanding service after service from localities while paying ’70s era property assessments. Literally, less than 1/10th of what families pay in taxes for owning the roof over their head.

    Truthfully, wipe out the corporate Prop 13 protections, and that’d go a long ways in saving individuals – renters and single home-owners.

  33. mrgraphics says:

    Governments are totally out of hand and are raping the people to spend like crazy. Here, the police get 100% of their salary for life when they retire. I DON”T GET THAT! I’ve got to SAVE for my entire working life. You tell me of any working stiff you has that sort of package these days.

    So now that the shortfall is happening, the cops are out busting people for speeding (tickets are up 65% in my area.) They’ll take their pound of flesh from us to protect their unrealistic system hell or high water.

    Police Chief Wiggum was right when he said “we’re not here to help, just to hurt.”

  34. cashba says:

    Regarding the local gov’t “drunken sailor” spending–
    I’m guessing we all forgot about the Minnesota bridge collapse?
    We all seem to have an anecdotal story where our town built something over-the-top, either in a dot-com era or a real estate boom, but some of those large capitol improvement projects were due to failing infrastructure, like the bridge in Minnesota.
    For example, my anecdotal story is of the the new high school with two flat-screen hi-def TVs eight-feet apart in 2000. But the high school was built in the first place because the two high schools had been overfilled for 25 years. So in the 1990s when gas was cheap and the auto-industry was in high times (oh to have those days again!), the city was able to pass a bond for a new school–decades after they were first needed.
    I prefer that my local government spends money on those expensive capitol projects that are only affordable in really, REALLY, awesome times to avoid those disasters. And if they upgrade just a bit (a couple of TVs in an 1500-student building isn’t much), at least we have the building!

  35. Bryan Price says:

    @SadSam: Aren’t you using your Homestead tax exemption of $25,000? And your tax rate has only been going up 3%/year max probably since you bought your house. Does that mean the millage has tripled on your property or is that because the rates have been going up? I’m paying taxes on property that is currently valued at around 105K, then less the 25K. Less than $1,300 in taxes this year. Actual value is at least $250K, and probably closer to 300K. Then again, the property was bought 16 years ago for 90K. The area is full of retirees, and we’re one of the youngest couples in our neighborhood — aged 50!

    And being in a bedroom community county, the local government doesn’t get squat compared to Duval or St. John counties. That’s why the school district wanted a .5% increase in the sales tax, which failed two to one.

    And with the tax changes that the legislature passed this year, and what happens with the vote next month, I’m not surprised at any local government being happy about what’s going on.

  36. iamme99 says:

    @CASHBA – I prefer that my local government spends money on those expensive capitol projects that are only affordable in really, REALLY, awesome times to avoid those disasters.

    Actually, most government projects aren’t often paid out of cash currently in the till. That money is likely already allocated to other things already.

    Instead, they issue some kind of bond. Then the taxpayers are responsible for the interest on the bond in good AND bad times until it is retired (usually 10-30 years). The longer the lifespan of the bond, the greater the amount of interest that will be paid on it to the bond holders.