Pete the Banker on PPS Bond and Levy: Impeding a Housing Recovery

April 20, 2011

Housing sales are falling nationally as well as locally. Oregon is among the most distressed markets in the nation with Portland area housing prices declining 5.4% in February, making it the third worst major market in the country tracked by Core Logic. Standard and Poor’s reports that Portland has over a four year inventory of homes. Here.

It is under this distressed real estate market scenario that backers are asking Portlanders to pass a Bond Measure 26 -121 to raise $548 Million, which will raise real property taxes by $2/$1,000 of assessed value for the restoration/reconstruction of several Portland area schools together with Measure 26 -122 an operating levy seeking to raise an additional $.74/$1,000 over the existing levy. (here).

Looking at the real estate market there are currently three types of sales. They include all cash primarily investor deals, distressed sales (foreclosures, short sales) and purchases dependent on financing. Each account for ~1/3rd of the overall sales volume, although in recent months distressed sales volume has been somewhat higher and purchases dependent on financing some what less.

In the case of each of these transaction types, this significant tax increase is likely to depress sales activity. An investor acquiring property is looking for a return on his or her investment. Generally, they will complete and analysis of the potential acquisition property by looking at the total revenue generated by the property, reduced by the property expenses to derive a net operating income. This income figure is then divided by the expected rate of return (or capitalization rate) to establish a value which is the maximum amount the investor would be willing to pay. Using Leonetti’s figure for tax increases on a median home of $960, and assuming no other changes in revenue, expense or expected rate of return (I’m using 8%), the increase in taxes would reduce price or value a potential investor would be willing to pay by ~$11,500 or another 3.3%.

In the second case of a distressed sale, it is hard to make a case that a tax increase would help an already delinquent or struggling borrower. In essence it may become the final “straw on the camels” back so to speak. And foreclosure or distressed sales are generally at prices well below existing market prices for comparable homes, further depressing the market prices for other residences on the market.

In the final case of homes purchase contingent on financing, an increase in taxes of the magnitude suggested will adversely impact the ability of borrowers to qualify for the loan. Generally, residential mortgage lenders consider the front end debt load ratio when qualifying a potential borrower meaning that the borrower’s potential housing expense including mortgage payment, taxes and insurance is compared to their income. Recently, regulators are considering enacting a limit of 28% of these expenses to the borrower’s income for qualifying mortgages, although this hasn’t been finalized yet. (Here) Obviously, if taxes are to increase by $960 in order to qualify a potential borrower’s income must also be higher, all other things staying the same to qualify.

Assuming a purchase of $350,000 or a median home currently (Here), the potential borrowers seeking a 90% loan (currently regulators and Congress are debating an 80% loan to value maximum, although it is likely this will be negotiated higher) then the following analysis would back into the necessary income to obtain a qualified residential mortgage through Fannie, Freddie or the FHA. The loan applied for would be $315,000 at a currently offered interest rate of ~4.75% on a 30 yr term. The Principal and Interest Payments would be $1,643/mo or $19,716/yr. Taxes based upon Leonetti’s analysis would be $5,065 per yr before the increase and $6,025 after. I am assuming insurance would run approximately $900/yr. So the total annual residential expenditures would be $25,681 and $26,641, respectively. This would mean that the borrower would be required to have a gross income of $91,718 and $95,146, respectively, based on a front end debt ratio of 28%. Notice that the income required jumps $3,428 or 3.7% because of the proposed increase in property tax. This means that fewer potential buyer/borrowers will qualify and will either be unable to finalize the purchase or be required to put more money down. Given that the median income in City-Data for median households with mortgages and apartment or rental households without mortgages is $74,824 and $44,788, respectively (Here), then such a tax increase will shrink an already small pool of potential home buyers who must rely upon financing to qualify.

In a State already struggling with higher unemployment than that of the nation and with those employed concerned about their financial future, this measure will increase obstacles to those struggling to stay in their homes, to investors assuming risk to acquire investment property, and to prospective homeowners to buy. The Measures are badly mistimed and are a formula destined to inflict further damage to an already weak and falling real estate market.

Tell ’em where you saw it. Http://www.victoriataft.com

Pete the Banker on PPS Bond and Levy: Impeding a Housing Recovery

April 20, 2011

SHARE