Category: land value

Time to buy land?

Bloomberg reports that upscale homebuilder Toll Brothers is starting to buy land even tho it already has enough for 15 years of development at current rates. This is a change from the prior several quarters, when they disposed of most of the lots they had held.  And Toll isn’t alone. “The 12 largest homebuilders by market value added 14,214 lots to their control over their two most recent quarters.”

It appears Toll spent $27 million in recent weeks to purchase land interests from a failed bank at “40 cents on the dollar,” presumably 40% of what somebody claimed the land was worth at one time.  This is just part of a reported $250 million that Toll has spent to acquire land so far in 2010. Still, they seem to have over $1 billion in cash available for further purchases.

Securities analysts quoted by Bloomberg don’t appear impressed by this strategy, suggesting that the cash would be better used to buy back shares, or acquire one of their more down-market competitors.  I dunno, somebody is gonna buy land at the bottom, maybe it’s Toll?

Who are putting their lives on the line for us?

A new report(pdf) from the U S Bureau of Labor Statistics provides 2009 data, pretty much consistent with earlier years, about fatality rates (per 100,000 equivalent full-time workers) in various occupations:

  • Fishers and related fishing workers 200.0
  • Aircraft pilots and flight engineers  57.1
  • Farmers and ranchers 38.5
  • Roofers 34.7
  • Refuse and recyclable material collectors  25.2
  • Driver/sales workers and truck drivers  18.3
  • Miscellaneous agricultural workers 16.7
  • First-line supervisors/managers of landscaping, lawn service, and groundskeeping workers 16.2
  • First-line supervisors/managers of construction trades and extraction workers 15.2
  • Grounds maintenance workers 15.0
  • Taxi drivers and chauffeurs  14.9
  • Police & sheriff’s patrol officers 13.1
  • All self-employed workers (included in the various occupational categories) 12.0
  • Firefighters 4.4

When I think about what occupations are really important to the maintenance of civilized life in my community, I definitely think of the farmers and the refuse collectors. And in an emergency, sometimes I have had to call on a taxi driver.  Some of the other categories maybe are less essential. I like fish, but not enough to risk death.

Of course police and firefighters face dangerous situations, but they are trained, equipped, and staffed to deal with them.  Maybe we need to give equal attention to some other essential occupations.

Economic Recovery Prevention Commission

I must not have been paying attention, but apparently on June 24 Governor Quinn’s Economic Recovery Commission issued its report. If we’re lucky, this will be one of those that just sits on the shelf.

The whole report is at the link above, or get the pdf from the direct link here, provided by the Executive Service Corps. It seems that a summary would be: “Raise taxes and make them more complicated, then give more subsidies to favored interests.” Among the tax increases are higher individual and corporate income taxes, and a broadening of the sales tax to include more services.

Those of us with a sound understanding of economics will be shocked discouraged to find that there is no mention of increasing the taxes on land value as a way of encouraging development and easing taxes on productive activity.

I’m not likely to review the whole report in detail, and doubtless it contains a few sound recommendations. I’ll just mention two other things that struck me.

First, we all know about TIF’s which divert real estate taxes to private pockets, and there are quite a few TIF’s that divert sales taxes, but this is the first I’ve heard of a TIF that diverts state income tax:

The CenterPoint Intermodal Center in Joliet, a 3,900-acre state-of-the-art, integrated intermodal center,  represents a $2 billion private investment. The center also will receive State investment under theIntermodal Facilities Promotion Act, signed last year. Designed to encourage business development along the freight rail systems of Illinois, the Act authorizes income taxes from jobs created at the facility to be placed in an Intermodal Facilities Promotion Fund. DCEO will administer the fund to reimburse CenterPoint for infrastructure improvements. DCEO will award an annual grant of up to $3 million in fiscal years 2010 to 2016.

Second, among the recommendations is an increase in the public employee retirement age to 72. I am no expert in retirement ages, and probably it’s appropriate to push the age up from 60 (which I believe it is now, and younger in many cases), but 72? No basis is given for choosing this age (other than the obvious fiscal benefits of more workers and fewer retirees. My guess is that nobody takes this recommendation seriously; had they recommended 65 or 67, there’d be a danger that the change might actually happen, but there are probably enough stories of senile 72-year-olds to prevent anything from being done.

China collecting some rent

Bloomberg reports that China has imposed what appears to be a 5% severance fee for coal, oil, and gas in one western province, and will extend it to others.  Revenue will be used to fund development projects in the area.

In principle, this is collecting the rent for the benefit of the community.  How it will actually work out cannot be known.

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.

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

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?

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.

Stumbling onto another land value tax endorsement

Just happened to find it while searching for something else in a Florida library

The killer argument in favour of a national tax on land values for any modern government relates to the effect of globalisation on the tax base. The ability of companies to shift their operations from one tax jurisdiction to another in a world of increasingly mobile capital means that the corporate tax base is likely to erode. This is taking longer to happen than intuition might suggest, but the logic of capital mobility and of transfer pricing by large corporations makes it inevitable. Rich private individuals are similarly prone to shift residence and domicile to minimise their tax liabilities. But it is much harder to shift factories, offices, shops and houses, and impossible to move the ground on which they are built.

The article also includes a prescient observation regarding the housing bubble

Better still, the effect on the housing market would be inherently countercyclical. When house prices and land values are rising, the tax would admittedly with a delay act as a dampener on the boom.

source: One tax to untangle this unholy mess.(real property taxes).
Estates Gazette (Feb 28, 2004): p.50.

POSTED: Assessor candidates debate

An mp3 audio file of the debate is now (February 2, 11 PM CST) available for download here.  At least two of the candidates  (Robert Grota and Sharon Strobeck-Eckersall, of the Green and Republican parties respectively) will be on the November ballot.  The two Democrats, Ray Figueroa and Robert Shaw, may (according to incomplete returns) have been defeated by a third candidate, who did not participate.

Inconveniently, the debate was held less than five days before the election, and it took our co-sponsor  more than four days to produce the audio file. Perhaps next election we will achieve better scheduling. It is also possible that most voters would not choose to listen to a 101-minute discussion on this subject, but at least we had hoped to provide the opportunity.

I will have some comments on the content of the debate subsequently.