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Foreclosure Crisis Stings Everybody by Mike Connell The Times Herald January 25, 2009

Foreclosure Crisis Stings Everybody by Mike Connell The Times Herald January 25, 2009. Presenter: Kristy Maxwell ECO 7500. Poor Housing Market Hurts Sellers. Connell: There were 51 foreclosure notices in the Times Herald last Wednesday. Market value of house down 15-20%

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Foreclosure Crisis Stings Everybody by Mike Connell The Times Herald January 25, 2009

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  1. Foreclosure Crisis Stings Everybodyby Mike ConnellThe Times Herald January 25, 2009 Presenter: Kristy Maxwell ECO 7500

  2. Poor Housing Market Hurts Sellers • Connell: There were 51 foreclosure notices in the Times Herald last Wednesday. • Market value of house down 15-20% • 1,200 foreclosure sales in 2008 in St. Clair County, which averages 1,300-1,500 home sales annually • “It’s very difficult to sell a house in this market unless you have the means to absorb a significant loss,” Jerry Frendt, a Port Huron-based real-estate broker.

  3. Desperate Sellers: Foreclosures May Be The Only Way Out • 12.8% unemployment in St. Clair County • 73,000 out of 170,000 people, 73,000 have full-time jobs; 43% of the county’s population • Second mortgages lost for long-time residents due to job losses • Loss of $40,000 of equity on house for professional couple who needed to move because of job-relocation

  4. Source: Michigan Labor Market Information www.Milimi.org *83 Michigan Counties Map Courtesy of: http://www.infomi.com/county/

  5. Despite Losses in Value,Property taxes Climbing • 1994: Proposal A passed, capping annual increases in property taxes • State-equitized value (SEV, assigned by a government assessor )should be half of your home’s market value • Long-term home-owners have taxable values being much lower than SEV (for now) • Theoretically, SEV = 50% Property Value • Taxable Value (TV) <= SEV • TV * Millage Rate = Property Taxes • Under Proposal A, TV never increases by more than the inflation rate or 5%, whichever is lower. • A large decline in property values  a large decline in property tax revenues

  6. How Property Taxes are Increasing Taxable value, it seems, has gone up every year because of increasing SEV, but because of the restrictions on annual growth, TV is still catching up to SEV. Therefore, homeowners will continue to pay more in property taxes despite the declining property values. SEV’s (in St. Clair County) must have increased much faster than inflation, thanks to the housing bubble. Rate of Increase SEV The gap between SEV and TV is declining. Inflation TV Time

  7. Other Problems to Adding to Increases in Property Taxes • Damaged property (frozen and burst pipes, vandalized and looted property) leads to lower sales prices • Assessors exclude those sales from their assessments • Frendt: assessors are excluding almost all foreclosure sales

  8. The Economics • Max U(police and fire dept. services, road services, community colleges, libraries, etc.) Such that Property Tax Revenue + Bonds + Other Revenue = Expenditures • Property Tax Revenue = TV* Millage Rate*N • TV increasing for home-owners • Foreclosures  N is decreasing, TV declines for new owners (from previous owners) • Budget Constraint must hold, so if property tax revenue declines without increases in other sources of revenue, then the county resident’s utility will decline. • The law initially increased utility for home-owners: • Let si denote the county’s homeowner’s savings in property taxes because of the difference between TV and SEV. • Present Value of Total Savings, PV(Si ) = ∑ i=0 14 (si/ 1+ri)i • This is a positive number, so if savings is part of the utility function, then the law has had a positive effect on utility.

  9. More Thoughts • If paying higher property taxes has a significant negative effect on homeowners (perhaps because it is more and more difficult to pay their property taxes), then the increase in utility might be washed out. • Since Proposal A was passed in 1994, the economy has never been worse until today. • With job losses, higher energy bills, and sky-rocketing college costs, and last year’s inflated food prices, finding the money to pay for rising property taxes is harder today than it probably has been since recession of the early 1980’s.

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