Why Declining Property Values are Hazardous Where You Live

Now your not going to like what I’m about to say here.  It isn’t pleasant news.  If you’ve been hearing rumors of an economic recovery underway, you’ll think I’m playing the role of a spoiler.  However,

The illusion of an imminent economic recovery in New York City has been televised.

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During 2007, New York City appeared resilient in the face of the national foreclosure crisis experienced in other states and major cities.  In California, Nevada and Arizona, the number of homeowners defaulting on sub prime mortgage loans threatened the financial stability of each state.

However, 2009 finds New York City at the place that each of the states mentioned were, back in 2007.  And each are in far worst shape than we are today.  Which should cause great concern for the prophetic nature their misfortune bodes for New York City as we implement the same measures they attempted.

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When a homeowner discontinues paying their mortgage, a few other obligations also go unpaid.  With over 90% of residential mortgages containing an escrow account feature, Hazard Insurance Premiums and Property Taxes also go uncollected along with principal and interest payments.

And while escrow accounts go unfunded by regular monthly mortgage payments, municipal budgets relying on projected property tax revenues will inevitably face deficits sooner than later.

New York City’s Financial Plan has a tremendous reliance on projected property tax revenue increasing over the next 5 years as the City braces for the worst the foreclosure crisis has to offer.

In our recent post, Is NYC Overcharging You in Property Tax [8/20/09], we examined how New York City has projected market values for properties in neighborhoods hard hit by foreclosures in excess of their actual worth.  New York City assess property tax based on market values of annualized property sales.

The City’s property tax revenue projections are in sharp contrast to its Neighborhood Stabilization Program, where the Dept. of Housing, Preservation & Development will purchase homes failing to sell at scheduled courthouse auctions for 85% of the appraised market value as part of their efforts to avert urban blight.

Now, I’m not the smartest guy in the room, but if the city is buying property at a discount to actual market value how will they maintain their current tax base?

If your still with me, then you’ve arrived at the central question I did some time ago: How are they arriving at their budget projections if taxes are based on the market value of real estate?

After reviewing the chart below maybe you can share with the class the City’s property tax revenue projections in logical terms.

The above is a snapshot of what’s actually occurring to property values in close to 30% of the borough’s real property.  The above neighborhoods also have the highest population density and largest 1-4 family housing stock in Brooklyn.

Let’s look at one neighborhood and examine the impact the above statistics will have.

If you combine the zip codes which contain the majority of residential properties in Bedford Stuyvesant, you’ll note the following:

• Zip Codes: 11216, 11221 and 11233

• Total Homes Sold as of 8/25/09: 342

• Current Homes on Market For Sale as of 8/25/09: 811

• Current Homeowners in Default on their Mortgages as of 8/25/09: 3,017

• Total Bank Owned Properties as of 8/25/09: 245

• Total Courthouse Auctions Scheduled as of 8/25/09: 98

Let’s put the statistical highlights above into perspective and see if the City Council and Mayor Bloomberg are onto something we’re not:

• For every 1 house sold, 2 houses still remain on the market

• Banks are attempting to sell 245 Homes they’ve acquired as a result of foreclosing on defaulted borrowers

• Banks are still in the foreclosure process with 3,017 homeowners, or 4 homes for every 1 currently on the market For Sale

• Banks realize there isn’t any real demand for homes, so they’ve only taken 1 house after winning a foreclosure litigation for every 12 houses currently in default

• Further, Banks are either slow or unwilling to modify loans of defaulted borrowers whose properties are worth less than the original mortgage borrowed

• In addition, conventional mortgage lending is practically non existent in this neighborhood as Banks continue to work through a growing portfolio of Non-Performing Mortgage Loans by defaulted borrowers in the same neighborhood.

Any economist reviewing the above statistical data, along with other market sources, would conclude that we are in a deflationary environment for real property in Bedford Stuyvesant and neighborhoods like it.

With property values declining so also will property tax revenue.  If no contingencies exist then you can look forward to

• Fewer Police and Fire Fighters
• Cutbacks in Health and Hospital Services
• Less money per students in public schools
• Higher frequency of Fines and Penalties to residents from Parking Violations to Garbage pickup infractions
• Increase in Homeless Population
• Increase in Criminal Thefts (burglary, armed robbery, larceny, etc…)

And an overall reduction in the quality of life currently enjoyed by residents living in these neighborhoods who did all the right things.

About those residents who live their; what else will change for them as a result of their homes being worth less today than a year ago.

• Probably will defer their retirements because they can’t sell their homes for the equity they assumed they would have to live off of
• Couldn’t send their children to the college of their choice because there is less equity to borrow against
• Wouldn’t be able to start that small business they’ve been planning to open in the neighborhood
• Would have to defer maintenance on their property at the cost of it increasing
• Offer rent concessions to their tenants to avoid losing the income
• Would be forced to sell at a loss as the proceeds from a sale would be short of what’s owed

Nothing in me hopes for this outcome for the sake of being right.  This is one time I would really want to be wrong.

Unless the City begins to really address the foreclosure crisis with a hands on approach, we could be on a direct course towards the inevitable.