Florida: April 2009- Property values, property taxes, constitutional challenge, should I buy now?, “Ponzi state”?

1.  Case-Shiller January 2009 Index

US property values continue to on their downward path. The January report shows Miami values fell 3.6%, 29.5% and 43.4% since previous month, over past 12 months and since the December 2006 peak, respectively. The US 10 city index fell 3.5%, 19.4% and 30.1% since previous month, over past 12 months and since the June 2006 peak, respectively. (You must remember that real estate prices tend to be very local; some parts of the US which didn’t have the major run-up in the early part of the decade, may be behaving in a much more rational manner.)For Miami the prices are back to October 2003 levels, while for the 10 city index at February 2005 levels. The graph does not suggest that we have bottomed. In fact Brett Arends in the WSJ’s “Home prices: Low, but still no bargain” suggests that we are unlikely to have bottomed given overall deflationary pressures and prices-to-average earnings higher than at the peak of 1989 real estate bubble. He also reminds readers that “when the last property bubble burst, it took about eight years before the market showed really strong signs of revival. This bubble was far, far bigger.”

2. Appeal of the constitutional challenge on property taxes

Lyons and Farrar, who have been driving the class action constitutional challenge in Florida courts against Save-Our-Homes amendment for the past few years, have launched an appeal for two of the classes in March. Talbot D’Alemberte , recently on Florida’s TBRC (Taxation and Budget Reform Committee), past President of the American Bar Association and Florida State University, has been added to the legal team.  The addition of high profile Mr. D’Alemberte to the legal team is very encouraging. The two classes addressed in the appeal challenging the constitutionality of the SOH and Amendment 1 are: (1) discrimination against individuals recently migrated to Florida (i.e. recently homesteaded vs. long-time homesteaders.) and (2) discrimination against out-of-state (seasonal resident) property owners. Let’s hope this fresh assault against the irrational and discriminatory property tax system will have a favorable outcome. Certainly the collapse of property values and the corresponding property tax revenue should be a wake-up call and an opportunity for Florida politicians to reform one of the most regressive and discriminatory property tax system of any state in the USA (see#3 below)!

3. Florida among only 7 US states discriminating against non-resident in lack of property tax limits, but takes #1 spot when one also includes homestead exemptions!

You may be wondering, what other states had similar discriminatory laws to Florida, which limit property taxes of locals, but allow unlimited increases for non-residents. Bill Owen one of the initiators of the above mentioned constitutional challenge forwarded to me a recent Bloomberg report by Jerry Hart Homeowners See U.S. Taxes Rise as Property Values Sink Amid Deficits – Bloomberg.com and he in turn led me to Haveman and Sexton’s Lincoln Institute’s “Property Tax Assessment Limits” report. If you look at Table 1 on page 11 of that report, it shows the 20 states which have some sort of property assessment limits (these are not exemptions), and among these there are six (6), in addition to  Florida,  which appear to have limits associated with homestead. My interpretation of the table is that Georgia (0%) is most severe to non-homesteaders, followed by Florida (inflation up to 3%), then South Carolina (15% over 5 years), Illinois (7%), and finally Maryland, Texas and DC with 10% max each per year. As I am writing this, it occurred to me to check if Georgia also has a homestead exemption (like Florida’s recently raised exemption of $50,000), and sure enough it does, but it is $2,000! (Even if you include the fact that Georgia only taxes 40% of the market value that would make the exemption equivalent to $10,000 in FL; by the way the mil rate in GA is 5-20 on 40% of market value, whereas in FL it is 17-23 on the full market value for non-residents.). So without doing a major study, it appears that Florida is the uncontested #1 (most) discriminatory state against non-residents in the USA. (Don’t forget that Florida one of the handful of US states without income taxes, so it lives off property taxes and sales taxes to a significant extent levied on out-of-staters (property owners and visitors).

4. Q&A- Thinking of buying in Florida: What about property taxes?

Q: (A recent, but typical question from somebody whose incorrect email address didn’t allow me to reply directly to) -We “are planning to go to Florida (Palm Beach area) to see is there is a good opportunity to buy a retirement property. We are not ready to retire just yet, but we believe that right now it could be a good opportunity. We do not have too much information and have heard that the taxes are very high. Is there any info you can give us?”

A: (Typical answer)

“I can’t give you personal investment advice.

I personally don’t think of Florida property as an investment. I think of it as a lifestyle choice that I made, which is a luxury.

The cost of condo ownership for example is composed annually of: (1)property taxes which are about 2% of the property value (Naples/Sarasota appear to be cheaper, 1.2-1.6%, while the east coast tends to be more a little higher, 2.0-2.3%), (2) maintenance fees are about another 2% or so (3) insurance perhaps 0.2-0.5%, (4) frequent “small” assessments by the condo association (a function of the age of the complex, mine averaged about 0.2-0.5%/yr), (5) cost of capital-i.e. mortgage payments  and/or loss of interest on the dollars spent to buy the unit, (6)property management expense, should you plan to rent it out, would be additional.

Items 1-4 (excluding cost of capital/mortgage, property management and any unusually high major repair assessments that may come your way on any property 25+ years old) add up to about 4.4%-5%.

Also you can expect that as property values fell and perhaps fall further these percentages will increase in the future to cover the various “fixed” expenses of counties, municipalities and condo associations.

The reality is that the cost of renting is comparable to the cost of buying, even excluding the cost of capital and any major assessments..

Bottom line from my experience is that it is not an investment; but a luxury (a lifestyle choice as long as we can afford to pay for it). Also with the overbuilding over the last 3-4 years the number of units available for rental is increasing, so rental income may not be increasing in the near future.”

5. “The giant Ponzi scheme that is Florida’

CBC’s Neil MacDonald tabled the report last week “The giant Ponzi scheme that is Florida’ warns about Florida scams and broken dreams: cheap fish passed off as grouper, new never owner-occupied (empty or now rented) run-down neighbourhoods, foreclosures, people leaving the state to find employment elsewhere. He quotes SFU’s Gary Mormino that Florida is like a “Ponzi state”. Well worth reading, even though he didn’t even mention the discriminatory treatment of Canadian (and other out of state) property owners in Florida!