Perpetual Liabilities: An endless note on your house you can never pay off

Imagine the perpetual loan, a loan that no matter what you do, you can never pay off. To help conceptualize the idea, think of it as a perpetual interest-only loan in which you are forbidden to completely pay off principal.

As preposterous as that deal may sound, it is highly likely you are in one.

If you own a house, you are in exactly that deal, except it conveniently not called interest. Instead it's called a property tax.

This is a post I have been meaning to write for years. However, I was finally inspired by a reader "Russell" who writes ...

Hello Mish

Here's a heads up from Portland Oregon. The city is proposing a property tax hike of 15 percent for the May ballot. Currently, most of the current city property taxes go towards police and firefighter pensions.

This proposed hike is "for the kids", threatening teacher layoffs. I assume this is the first of many hike attempts that we will be seeing in the near future.

Do we really own our property? I say we don't. We basically have a note that we can never pay off from the government. I will now have to pay around 550 a month for the right to own my house.

Isn't that like a 100,000 dollar note that can never be payed off? Why own property in these cities? Why live here? That is what my wife and I are starting to face. We like our neighborhood and the city in general, but if may be time to leave.

Thanks again for all that you do (that you can put this kind of content out daily blows me away),

Russell

Portland Seeks Two Tax Hikes

Oregon Live reports Portland school board unanimous: A second school tax hike on the May ballot

The Portland school board voted 6-0 tonight to put a second tax hike before voters in May, saying a higher operating tax is needed to save 200 teaching jobs in Portland Public Schools.

If voters say yes, the local-option property tax set aside to bolster Portland schools would rise to $1.99 per $1,000 of assessed property value, a 60 percent increase from the current $1.25 per $1,000 voters approved in 2006.

It is the second tax increase the school board has referred to the May ballot. The first was a record-setting $548 million school construction bond that, if approved, will cost property owners $2 for every $1,000 of assessed property values for the next six years.

School board members said that financial hard times for families make this a tough time to ask property owners to pay more.

But they said cutting more than 400 teachers, rather than about 150 as would be necessary if the levy passes, would be too harmful to students and to the local economy.

"We are talking about protecting family-wage jobs in Portland," board member Bobbie Regan said.

Tell Bobbie Regan to Stuff It

What Portland needs is a competing measure on the ballot to lower taxes.

If you live in Portland, it is your patriotic duty to get Bobbie Regan's phone number, call her up and tell her where to go. The arrogance and gall of these people is amazing.

Not a single teacher need lose their job, not a one. All the union has to do is accept lower wages or benefits. Instead they want to tax you to death, not one but twice so the teachers' union can get wages and benefits that no one else does.

Compute Your "Endless Note" Interest

To compute your perpetual interest, take your property tax and divide by the estimated fair market value on your house.

Property taxes in Illinois are insane. I pay about $14,000 a year ($1167 a month!) on a house worth about $650,000. Thus my property taxes are roughly 2.2% a year. Is this really "owning" a house?

Why Own a House?

As noted above, you can never really own one. Property taxes are a perpetual liability.

However, I made an agreement with my wife, decades ago, that we would get a house as soon as she finished school. She wanted one, I didn't. However, now that I have one, I am happy with it. There are tradeoffs.

My advice to people has not changed. If you want a house and can afford a house, then as long as you really know what you are getting into, and as long as you are quite sure your job is stable then buy a house. (That's quite a lot of IFs)

In 2004-2006 I was more vehemently opposed to buying a house than now.

Twenty years ago you could get nice appreciation, but that is no longer true. Moreover, I suspect that once home prices bottom, prices will stagnate for a decade.

Thus, there is no compelling financial treason to own a house. Indeed, from a financial perspective, there are good reasons to not own a house.

However, there are more important things than money. If having a house makes you or a loved one happy, then as long as you can afford a house, and as long as it does not make you a debt slave, it is reasonable to buy one.

The biggest key right now is making sure your job is stable. If it's not, then buying a house might bankrupt you if you lose your job. Unfortunately, many people vastly overestimate the stability of their job.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List