Weekly Rate & Market Update 10-14-16
Question: I just received my tax bill and the amount is higher than last year. Why is it higher, I thought because of Proposition 13 my property taxes would always stay the same?
Answer: This is not an uncommon question this time of year because of confusion, or lack of knowledge, about Prop 13 and property taxes. Hopefully this will make it clear up any misunderstandings.
Proposition 13 was passed by California voters in 1978 to limit property tax increases. The impetus for the measure was rapidly increasing property tax bills that were forcing many California homeowners on fixed or stable incomes to sell their homes as they could not afford the every higher assessments every year. It set a base tax rate of 1% of the 1975 property value for all properties in 1978 and moving forward the rate would be 1% of the purchase or transfer price of all property.
One of the provisions of Prop 13 is that while your base assessment is determined by the purchase price of your home, there are some instances in which your annual tax may increase; most notably if you have remodeled your home and added square footage or major improvements.
If you did not undergo major improvements then your property taxes increased because Prop 13 included a provision that the base tax can increase every year by the lesser of the increase in the cost of living index for California or 2%, whichever is less.
In December last year the State Board of Equalization released the 2016-17 California Consumer Price Index to county assessors indicating that CCPI increased 1.525%. Since this is less than 2% your base tax bill shows a 1.525% increase from last year’s bill. (In numerical terms for every $1000 in property taxes you pay the increase is $12.50).
Almost no California property owners pay only 1% of assessed value because there are additional assessments and indebtedness voted in by the electorate or mandated by state and/or local legislatures, so your tax bill is probably more than 1.525% higher as that just applies to the base tax per state law. For instance in Long Beach our home has an additional 20% in assessments added to our tax bill from the base tax bill for such items as a bonds for the community college and K-12 school districts for building new structures and retrofitting older ones, water district assessments, parks, flood control and trauma services.
In the 1980’s voters passed Proposition 60 which enables homeowners over the age of 55 to transfer their current tax base to another home of equal or lesser value; this was in response to older Californians who were retiring and downsizing. Perhaps selling their home they bought for $50,000 in Huntington Beach and were able to sell for $400,000 and transfer their equity to purchase a home in a Leisure World retirement community for $200,000. Many seniors were balking at such a transition because their property tax would go up considerably at a time when they were transitioning to a fixed income. Since the passage of Prop 60 many counties have passed other measures that allow transfer of taxes between counties, thus enabling the explosion of retirement communities in the Inland Empire where builders could sell seniors on relocating to smaller, newer homes while retaining their lower tax bases.
California also allows parents to transfer the tax base on their primary residence to their children provided they will also retain it as their primary residence. If Mom and Dad have an annual tax bill of $2000 on the family homestead in Ventura and decide to sell the home to their son and daughter in-law for $600,000 gifting them equity for down payment, the kids can move in and retain the $2000 annual tax base instead of paying the higher base of $6000 per year.
There are many who complain that Prop 13 is unfair to those who do not own property, or to those who have purchased property in recent years compared to those who purchase decades ago and enjoy lower tax rates than their newer neighbors who enjoy the same benefits of those taxes. The alternative is to return to the time of ever higher property taxes and once again seeing older Californians or those on fixed incomes not be able to retain their properties due to being unable to afford their ever higher tax bills. There are many states that still have annual reassessments of property values and therefore higher taxes, however most if not all of these states have a very low or no income tax and sales taxes off-setting the increase in property taxes.
Understanding the political challenges of getting property owners to vote for ever increasing property taxes that could/would outpace their income in later years, those in favor of modifying Prop 13 to allow for higher property taxes when values increase are starting to focus on commercial property owners. This approach seems appealing because older California homeowners would not be impacted, however the hundreds of thousands of small and medium size businesses, most family owned, would be dramatically impacted as most commercial leases are “triple net” where the business tenant pays the property taxes. There are some loopholes in the tax that could be closed to increase some of the taxes being paid on commercial properties, particularly extremely high value buildings whose owners can transfer using some of the loopholes to considerably undervalue property taxes and reassessment. However a blanket change for all commercial property would have a deleterious impact on the state economy.
With the highest income tax, sales tax and gas tax California should be more than able to afford the stability Prop 13 brings homeowners, the problem is not lack of revenue but lack of spending control the past several decades in Sacramento. Elimination of the provisions of Proposition 13 will harm property values, harm elderly and fixed income homeowners and ultimately reduce long term revenue to the state.
Remember, with Dennis it’s not just a mortgage, it’s your complete financial picture.
Fed fight! Well, not really a fight but some feistiness apparently at the Fed’s September meeting of the Open Market Committee—the folks who decide to raise the Fed Funds rate or not. The “hawks” (in favor of moving the rate up) argued that waiting to increase the rate will only mean that in the future there will have to be more and quicker hikes. The “doves” (low rates) argued that inflation is still too low. Not in the minutes was waiting until after the election to not appear to be trying to influence voters. The Fed minutes pretty much re-affirmed for everyone that one year after its hike in December 2015 the Fed will most likely/very probably hike again this December. The minutes caused a lot of huffing and puffing in the rate markets and created upward pressure on rates.
Some positive economic news today, in the release of data for the Producer Price Index and Retail Sales for September—both bounced up nicely from August. Wholesale prices, as measured by PPI, rose 0.3% for the month and are up 0.7% year over year providing a little bit of inflation for businesses that pleases the Fed. Retail sales after being negative in both July and August jumped 0.6% in September. Driving the increase was auto sales which climbed 1.1%. Both of the economic release support higher interest rates.
Rates for Friday October 14, 2016: Mortgage Backed Securities (MBS) came off the three day holiday lower than market close last Friday (lower prices = higher rates) and there was no data or news to push MBS prices higher (lower rates). With conforming fixed rate under pressure at the end of last week the drop to start the week was enough to push the rate higher after a stable three weeks. At this point the high-balance conforming rate is maintaining the same rate it has had since July 22nd. With Fed rate hikes imminent the market will get squirrely (technical term) and now is not the time to try to beat the market—lock your rate when you can.
FIXED RATE MORTGAGES AT COST OF 1.25 POINTS
30 year conforming 3.25% Flat
30 year high-balance conforming 3.50% Flat
30 year FHA 3.00% *** Flat
30 year FHA high-balance 3.25% *** Flat
Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down (3.5% for FHA) with 740 FICO score for purchase mortgages. ***FHA rates have may have no points and credit towards closing costs, changes daily.
The Update is a bit later this Friday as I spent part of the day at a wonderful award luncheon put on my our local Rotary district. Clubs from our district (parts of LA and Orange Counties) nominated individuals, companies and organizations who have made significant contributions to their local communities. With all of the negative comments, posts, memes, editorials, etc, etc we have been subject to it was refreshing to be reminded that what happens in Washington is far less important to our lives and our communities than the everyday efforts of “normal” citizens and companies that just want to help make things better.
I know a lot of you on this email list participate in many ways to better your/our communities, not for gratitude or accolades, but just because you want to help. That was what we celebrated today. While some got certificates and applause, my fellow Rotarians and I were really celebrating everyone who actively participates to make our little part of the city, state, country, world a better place. Thank you for all you do!
Have a great week,
Dennis
Missed a Weekly Rate & Market Update? You can catch up as all the updates are posted on my website at http://www.denniscsmith.com/MyBlog .
