Author: Administrator

A percentage of a lot is quite a bit

Here are a couple more examples of troubles we wouldn’t have under a just economic system.

Mortgage servicers incentivized to prevent mortgage modification. Many commentators have pointed out that, if the value of a property declines below the market value, and the homeowner is unable to pay, the lender is better off agreeing to reduce the principal to an amount consistent with current values.  (This is true even in the absence of any government-funded incentives.) So why does it rarely happen? It’s because lenders, apparently to conform to bizarre federal tax rules, have given up the right to modify loans.  Only the mortgage servicer, an independent company (tho sometimes a subsidiary of a big bank),  has the right to do that.  But the mortgage servicer is paid based on a percentage of the outstanding principal, thus has no incentive to help reduce it.  (Cash incentives offered under a recent federal program apparently aren’t large enough to matter.)

The geoist perspective: If land values were fully taxed,  real estate prices never would have bubbled, and mortgages would cover only the cost of the house, not the cost of the land it occupies.  Therefore mortgages would be smaller, perhaps rarer, and the whole problem of numerous underwater homeowners could never have occurred.

A little extra sleaze for municipal bonds. When a municipality (or, for that matter, any organization) issues bonds, they choose an underwriter who, for a fee, agrees to get all the bonds sold.  The issuer may choose the underwriter by open bid or by negotiation.  Academic research shows that, in the latter case, interest rates tend to be 17 to 48 basis points (hundredths of a percent) higher.  So how were 85% of the $378 billion in municipal bounds issued last year underwritten? By negotiation, which seems in theory to be costing taxpayers several billion dollars over the life of these bonds.   And that 85% includes 100% of bonds issues by the City of Chicago.  No one familiar with local government will be surprised at the reason: “[T]he city and its aldermen want to reward those who support public officials and politically connected charities.”

The geoist perspective: Most public debts are issued to benefit the underwriters and bond purchasers. At best, the funds are used for improvements that increase land values. Therefore, capital investments should be paid thru a tax on land values. If the landowner who benefits hasn’t enough cash to pay her share, she may need to borrow privately to cover it, but the general public should not be liable. If the improvement does not increase land rents enough to justify its cost, then it is not worth doing.

Much more information about both of these outrages is provided in the source articles, which you should read unless it would make your head explode.

Terms & Conditions: Souls for Sale

For just one day (April 1, of course) a UK merchant added to their terms and conditions which every on-line purchaser is required to accept:

…you agree to grant Us a non transferable option to claim, for now and for ever more, your immortal soul. Should We wish to exercise this option, you agree to surrender your immortal soul, and any claim you may have on it, within 5 (five) working days of receiving written notification…we reserve the right to serve such notice in 6 (six) foot high letters of fire, however we can accept no liability for any loss or damage caused by such an act.

Purchasers were offered an opt-out checkbox, but apparently only 12% checked it.

Of course nobody reads the terms and conditions.  (Actually, I have met one person who claims to; I didn’t ask him whether he had actually purchased anything on-line.)  On more than one occasion I’ve found the link to terms and conditions didn’t work, or made no sense, have notified the vendor and usually received an updated link or a correction.

Investing risk vs. return: Henry George was right

Back in the ’70s when I learned about investing, we sophisticated folks understood that financial markets are “efficient” and the Capital Asset Pricing Model (CAPM) would guide us.  You could reduce your risk somewhat by having a diversified portfolio, but to get a higher return you’d have to accept more risk of loss.  Of course there was no Internet, no easy way to check this for ourselves, but I did get access for a time to a remote terminal connected to a computer which supposedly allowed me to test this theory.  I did so, and the results were consistent, tho today I certainly can’t remember the details.

So when I first read Progress & Poverty in the ’80s, I was a bit troubled by this from Book III Chapter 4: Continue reading Investing risk vs. return: Henry George was right

Taxing billboards– a win-win?

Since billboard value is a function of location in the community, it’s only fair that the community should collect most of the rental value.  Accordingly, the City of Toronto expects to collect C$10.4 million/year with a tax of $850/$24,000 per billboard, “depending on size and type.” Naturally, the billboarders object, saying that they’ll pass the tax on to landowners and advertisers (which somehow makes it illegal– but I do not understand U. S. law, let alone Canadian).  But of course, all taxes are ultimately paid by landowners. Perhaps the tax will reduce the number of billboards, but most citizens are likely to survive this loss.

Mayor Daley, being in a taxing mood, might want to consider this, if his obligations to the billboarders aren’t excessive. Chicago Reporter has found many illegal billboards in the city, and that politicians receive, not only free space, but cash contributions, from the billboarders.

ht Frank Dejong

Free “enterprise” at work

It’s true that census confidentiality is imperfect and could be used to compromise civil liberties, but I can’t imagine any way that it could be used to steal one’s identity (especially if one is cautious enough not to provide name information on the form). IRS, that’s a different matter.  Anyway, Equifax has found another way to sell their protection racket.  If it’s “only $4.95” for the first month, how much is it thereafter?

taking advantage

More general ignorance of economic fundamentals

Fannie Mae’s new National Housing Survey, intended “to gauge the public’s current attitudes toward housing,” shows that Americans still believe buying a home is a good investment, and socially beneficial. Both ideas are, as Felix Salmon put it, “horribly misguided.”  Public policy subsidizes owner-occupants in numerous ways, all of which get capitalized into the price of real estate making it even less affordable.  One might be able to time the market so as to buy and sell one’s house profitably, but it’s not something to count on and many of us have had things go disasterously the other way.

Salmon’s done a good job of describing some of the social costs

[T]he top two reasons to buy a home are that “it means having a good place to raise children and provide them with a good education”; and “you have a physical structure where you and your family feel safe”. Reading between the lines here, I think that what we’re seeing is the effect of rental ghettoes, and the fact that neighborhoods with high levels of homeownership tend to be safer, and have better schools, than neighborhoods which are mostly owned by landlords. That’s a negative aspect of homeownership, in the grand scheme of things, but it’s clearly here to stay: no one’s anticipating a more sensible world where it’s commonplace to be able to rent a house in a good school district.

And most of those surveyed– renters, unmortgaged owners, mortgaged owners, underwater mortgaged owners– still think that now is a good time to buy themselves a house.  Imagine how they’d react if told that now is a good time to shift more taxes on to the land they want to buy. Will they sit still long enough to understand the mechanism that makes housing easier to afford when land is taxed?

Have medallion prices peaked?

When last reviewed here, prices for Chicago taxi medallions had risen to an average of $185,000.  Prices have since peaked at $202,000, but now are below that previous level.  The March Chicago Dispatcher printed edition includes an ad offering to pay medallion owners $750/month, which implies almost 5% ROI if prices stabilize.

Month                Price               Source
February ’10      $183,000        Chicago Dispatcher
January ’10        $184,000        Chicago Dispatcher
December ’09    $202,000       Chicago Dispatcher
October ‘09       $185,000       City of Chicago
May ‘09             $170,000       Chicago Dispatcher
April ‘09            $164,500        Chicago Dispatcher
March ‘09           $165,000        Chicago Dispatcher
February ‘09      $158,000        Chicago Dispatcher
Feb ‘07               $  77,000        Chicago Tribune
2004                   >$40,000       Chicago Tribune
1991                     $28,000         Chicago Sun Times

Eventually the City of Chicago may post more recent information here (scroll down to “Taxicab Medallion Transfer Price List” for the pdf report.)

If our rulers wanted to reduce medical costs…

…there are two things they would do.

First, they’d eliminate taxation on income earned by persons who are providers or consumers of medical services. No income tax, no payroll tax, no tax on buildings, no sales tax, nothing (pdf).  Huge drop in medical costs, along with an increased income available to pay them.  Of course this change would increase land rents, as all enterprises would suddenly be much more productive.  These rents, or the analogous land values, would be taxed instead, to provide whatever governmental revenue is needed.

Second thing they would do is to reduce patent protection on medical drugs and appliances.  I don’t know that it needs to be eliminated, but probably the 20-year term should be shortened to, say 10 years. Preferably this should apply to existing patents, but at a minimum future patents would be restricted.  This would reduce drug and equipment prices, as more generics could become available. Many analysts believe patents are more of an obstacle than an encouragement to innovation.  Even if that is incorrect,  it seems that most new drugs are hardly essential, and are profitable only because so many consumers have no choice about paying for them.  Is there one person who would have died if some new expensive patented drug didn’t exist?  Of course, but there are many people who die because they can’t afford adequate medical services.

Of course, even if the above two actions reduce medical costs 90%, there will still be someone with a rare and serious illness, costing $2 million to treat.  Reducing the cost to $200,000 is great progress, but not everyone has $200,000.  So, once taxes on productive activity are abolished and patents are reformed, I  have no problem with government using some of the revenue from collecting the land rent to fund treatment which if privately paid would lead to financial catastrophe.

The wrong way to estimate land value

I do appreciate that our wealthy colleagues at the Lincoln Institute of Land Policy have compiled and published estimates of residential land value for states and major metropolitan areas. I just wish they had been more careful.

Geoists are often challenged to demonstrate that it’s feasible to estimate land value.  It’s a fair question, and we have good responses. Assessor Ted Gwartney wrote an accessible paper on the subject, as did Alex Anas and William Vickery (neither on the ‘net, afaik, but if anyone asks I will try to dig up the cites). There are several valid approaches, depending on the specific situation.  For instance, in an area with many teardowns, the value of land is the purchase price of the teardown parcel, plus the cost of demolition. Other methods are used where there’s more vacant land, or new development is taking place, or land is being condemned for public purposes, or land ground leasing is common, etc.  Once you have values for a few parcels, you estimate the remainder by comparing their size, location, and other characteristics to those you have good numbers for.

Lincoln’s estimates illustrate why it’s wrong to estimate land value by subtracting depreciated improvement value from total parcel value. They have undertaken to estimate the land and improvement value for the average single family home in each state, for each calendar quarter since 1975, most recently for the first quarter of 2009.  And they did it by subtracting depreciated improvement value from total value.  Thus they find that the average house in Illinois sits on a lot worth $12,480,  compared to $23,260 in South Dakota. Montana’s average is $69,949, Arizona’s $90,040.  These numbers simply make no sense.

Their MSA estimates are a bit less bizarre, but don’t seem consistent with the state-level estimates.  One reason may be that for the metro’s they could use American Housing Survey information.

It is good that somebody is trying to estimate some portion of land value.  It would be even better if it were done reasonably well.

Lincoln are also starting to compile some comprehensive information on how and how much the ownership of property is taxed in the various states. So far the information seems quite limited, but eventually, if carefully done, it may be exceedingly useful.

btw, with this post I am initiating a new category, “dependent scholars.”  This is to distinguish the employees and grantees of Lincoln (and many many other institutions) from actual independent scholars.