In its recent release of City Fiscal Conditions, the National League of Cities reported that “all major tax sources grew slower in FY 2017 than in FY 2016. Property tax revenues, a staple resource at the local level, grew 2.6% in 2017 compared with 4.3% in FY 2016.” Among the finance officers surveyed, 28% reported that their communities increased property tax rates, so in fact, organic growth in property revenues (based solely on increases in assessed valuations) is lower than the 2.6% noted. Why is this?
Numerous factors contribute to slower property valuation growth. For one thing, until a financially meaningful solution can be implemented to lighten the student loan burden (currently around $1.5 trillion, more than credit card debt) and we see enough wage growth to incentivize new household formation we are unlikely to see much progress in the near term. Plus, policy change and economic growth, however meaningful, must also be enough to overcome higher mortgage rates to see an uptick in homebuying.
Loss of the SALT deduction, to some extent, contributes to a slowdown too. We were surprised to see the Dallas federal reserve district report that home sales were flat over the last month and a half in the latest Federal Reserve beige book. This is unusual for Texas which has had steady and rapid job and real estate growth and there is no income tax in the state. Deductibility of mortgage interest and property taxes from federal income taxes have long been a selling point for residential real estate in Texas.
According to Census figures, the percent of the population that changed residence in 2017 was 10.6%, roughly half the rate from prior decades. From the post-war 1940’s through the mid-1960’s, the percent of movers hovered in the 19-21% range. Historically, moves to a new residence across state lines would typically be for jobs (and to some extent as the population ages, for retirement) while intra-state or intra-metro typically take place for life changes such as family formation, marriage, divorce or post-retirement down-sizing. In the second half of the 1960’s the rate of movement to a new residence fell to 18% and then declined steadily each decade to the most recent 10.6% period. The last two recorded declines might be associated with Federal Reserve rate tightening which shows up in highermortgage lending rates.
Second, Millennials are the largest adult generation in the U.S. so the effects of their behavior is as important to the economy as aging Baby Boomers (75.4 million aged 22-37 vs.75.9 million aged 52-70). They are well-educated, energetic and of diverse backgrounds. Many millennials are migrating, but mostly to urban centers and they are renting rather than buying. They are starting family households far later than earlier generations.
As William Frey, noted demographer at the Brookings Institution wrote in March, 2018, each of the ten highest metro destinations for millennials is in the South and West. Colorado Springs, Denver, Austin, San Antonio, Houston, Orlando, CapeCoral, Sarasota, Honolulu and Seattle each had more than 10% growth in millennials over the last decade. In terms of metro areas with the highest “footprint” of millennials, according to Frey, Provo, Utah is at the top with more than 30% of the population in the 18-34-year-old age group. (BTW, Provo is a Google “node”with super-fast internet service, in case you were wondering.) Metro areas that are missing out on the Millennial trend, unsurprisingly, were mostly located in the Midwest and northeast and included: Salt Lake City, Dayton OH, Syracuse, Milwaukee, Jackson MS, Youngstown, St. Louis, Toledo, Chicago and Birmingham AL.
Homeownership has fallen from a peak of 69.4% of all households in Q2 2004 to 63% in Q2 2016. It has since sprung back to 64.4% in Q2 2018, according to the St. Louis Federal Reserve (FRED). Home prices have risen however, with the Case-Schiller national house price index from a post-recession bottom in February 2012 of 134. The index has since rebounded to nearly 206, suggesting a decoupling of demand for homes from home prices. (This could be another case where the strength at the top of the housing market is pulling up the lower tiers — see our previous post “The Trouble with Macro” — but this is subject for further investigation.) The reduction in ownership is notable given growth in the overall population of 21.7 million from 2009 to Sept. 2018 (FRED, not seasonally adjusted). We also note that the strongest millennial magnets are not the high-priced cities like San Francisco and New York.
High-priced cities are, for sure, pushing Millennials to move to smaller, lower cost…but nearby locations – such as Worcester, Massachusetts which is attracting Boston refugees. A recent NPR radio show highlighted this trend. Hoboken and Jersey City in the New York metro area and broad circles around San Francisco (including even Sacramento) are attracting new homesteaders.
Walkable and transit-oriented multi-family development with a variety of amenities continues to appeal to a “barbell” demographic: young workers and older down-sizers and retirees. This was underscored by Cathy Marcus of PGIM Real Estate in a November 1st Bloomberg Radio broadcast. Of interest, Marcus commented that developers often overdo it which leads to higher prices and loss of affordability.
As pointed out in a three-part series by the St. Louis federal reserve, the rental market has become stronger since 2006, adding more than seven million units, an increase of 20% (both single and multi-family). The strength of the rental market is one reason for slower activity from first-time homebuyers.
Affordability continues to be an issue, and supply is tight at the lower and mid-tiers of the existing housing markets. Homeowners within the lower and mid-tier price range are holding onto their homes and not moving up as in prior generations. Some of the lack of supply, too, is because developers have concentrated on the high-end amenity-rich projects. Higher prices on large homes makes it more difficult for homeowners to consider trading up.
We don’t see the trend in property tax revenues changing much in the near term. Despite many communities deciding to raise property taxes, there continues to be pushback on this, particularly from governors and statehouses over the last number of years. It is interesting that sales taxes are on many ballots in November, particularly in California, a state highly averse to property taxes. However, revenues overall are likely to look better at the local level in 2018-2019, given new resources, such as online sales tax, sports betting, growing marijuana legalization, generally positive growth in job markets not to mention stronger income tax from the upper crust. In addition, state revenues have already been bountiful this fiscal year. While these monies are mostly going into rainy day funds and reserves, some may trickle down to the local level as well.
In keeping with our “Then and Now” theme, we link to an earlier post on Migration on thepublicpurse.com.
