Flippin' Amsterdam NY

I stumbled upon this today (here) and it reinforces my general philosophy and strategy toward addressing local real estate values with some quantitative backbone. Here is the conclusion from the report with highlights bolded and  my comments in green within the conclusion:

The evidence suggests that property tax revenues are quite responsive to changes in house prices. ( higher property prices generate higher tax revenues) Although it takes several years for house price appreciation to feed through toproperty tax revenues, the long-run elasticity is on the order of 0.4. On average, policy makers are estimated to respond to increasing home prices by reducing effective tax rates (higher prices lower effective tax rates) so as to offset 60 percent of the increase in tax revenue that would have occurred in the absence of a change in the effective tax rate. Institutional features of the property tax, such as delays in bringing assessed values into line with market values (the failure to adjust assessed values in the year-over-year increases in our market values has actually lost the city revenue and also as a consequence failed to deliver the reduction in the effective tax rate mentioned above; this is why assessments are so important and why the argument for keeping legacy assessments is precisely wrong and ill-advised) and caps and limitations on the tax, likely explain the lag between house prices and tax revenues (and may also influence the magnitude of the relationship.)

There is some evidence that the elasticity is smaller for unusually large house price changes, suggesting that policy makers and voters may prefer to avoid unusually large increases in property tax bills. Similarly, there is evidence that during periods of unusually sluggish house price growth the elasticity is larger, suggesting that policy makers and voters may not want tax revenue growth to slow too much. The evidence on the impact of house price depreciation is somewhat mixed, but on the whole there is little evidence that house price declines influence property tax revenues. It appears that policy makers raise effective tax rates to offset declines in tax revenue arising from downward swings in the housing market.  (The Amsterdam syndrome: declining house prices raise the effective tax rate). These estimates should be interpreted cautiously because they come from a sample in which most house price declines are relatively small. Thus, the results may not accurately predict the response of local governments to some of the large price declines that have occurred in different parts of the country, given the political difficulty of increasing tax rates under such circumstances.

So the bottom line is that by failing to adjust assessments during the increase in real estate values, we actually cost the city tax revenue during that time and with the subsequent decline, we have raised the effective tax rate.  The ideal lose-lose policy scenario.

This is the folly of blindly focusing on high taxes while ignoring market and assessed values.

From GCAR Report (here) on Montgomery County:

For Year-to-Year Comparisons from 2009, the takeaway is:

Median Sale is $77K down 14%

Average Sale $107K flat 0% — this in light of median tells us most of action is on the lower end with a higher end sale(s) likely pushing the average up

Number of Listings: down 11%

Number of Sales: down 47%

My usual caveat: figures reflect the county; we’re not in the peak season of the real estate market; market trends are down across the board not just Montgomery County

But please don’t discuss local policies vis-a-vis impact on the real estate market in light of a county wide unemployment rate of 11.6% and a failing school district. Let’s just focus on the usual rubbish.

Hey, did you know we have high taxes? Who knew! So ignore plunging asset values and homeowner equity and let’s quibble over important items like cell phone plans and how to save a few thousand dollars. It’s not like the rate of unemployment, the quality of the school district and the health of the real estate market impact tax rates and livability of a community.

If anyone is free today, I’ll be rearranging deck chairs on the Titanic and then getting a front row seat on the hill to watch Rome burning.

I’m at a loss to explain the stories below in light of the fact that our county unemployment rate is now 11.6% :

State of optimism :

Aldermen Consider Salary Hikes

I’d like to see a sense of urgency with such dismal numbers and numbers turning more dismal since the last report. Yet, we’re going to discuss cell phone plans and hold a demagogue-fest at the county.

I can’t fault the aldermen for putting a salary increase on the table in light of the school district. As we’re an accountability and performance free community lacking any will for change preferring griping over acting, I should not be surprised. But really, I can’t always be the only one shouting ‘WTF’.

GASD board OKs administrative raises

I posted a while back on my support for the repurposing of the Chalmers building (here). I’d like to reemphasize a point in my piece(emphasis added):

What struck me in the editorial is the dismissal of Uri Kaufman’s project as complete speculation while at the same time embracing Via Ponte as a “sure thing”. Yes, Kaufamn’s project is speculative and risky. But Via Ponte is not? According to this, Via Ponte is meant to be:

Via Ponte Project will provide the Southside of Amsterdam with a shops and stores that are not currently accessible via foot in this part of the City. Via Ponte will be connected to the north side of the City via a pedestrian bridge scheduled for construction in 2009.

So the “sure thing” about Via Ponte will be more shops and stores. And this is a sure thing?

Step back and consider how very different the proposals are in terms of vision and economics. Via Ponte relies upon creating a set of shops and stores that will interconnect to the Amsterdam Mall via a pedestrian bridge. Please read the prior sentence again and see how ironic it is. A failed “sure thing” of the past — the Amsterdam Mall– will be the end point of the next sure thing, the shops and stores at Via Ponte. Why must every sure thing in Amsterdam be retail related?

With today’s story on Chalmers and the difficulty with Uri Kaufman acquiring funding (here), I’m going to address my thoughts from last year and my thoughts moving forward.

I’d supported a repurposed Chalmers as it had the potential to : 1) increase the level of housing stock 2) attract a younger, more affluent demographic 3) reuse a significant piece of architecture and history 4) provide a template for public private investments in the city 5) disrupt the status quo

Let me focus on “disrupt the status quo”. If you’ve lived here for any length of time as I have, you realize that the willingness to take risks or to think outside the box is close to zero.  That is why we endlessly do today what we’ve been doing for decades: bemoan the high tax rates, watch the city spiral  downward, obsess with political battles for thousands of dollars while millions of dollars pass us by.  Meanwhile, substantive change and improvements never materialize replaced instead with a steady drumbeat of decline.

My premise with Chalmers — and by extension the city — is that meaningful progress can only occur with meaningful changes in policies and strategies.  That’s how risk works– if you take more risks, you may get a bigger reward (or a bigger loss).  If you take no risks, you will tend to get smaller or even negative rewards. That’s how risk-reward should work.

With Chalmers, I viewed and still view the risk of pursuing the Kaufman proposal as minimal as the fallback plan still allows the city to pursue Via Ponte and demolition if the deal were to fall through. I’m not aware that any of the funding for demolition or Via Ponte has been put at risk by granting Kaufman the option. In my mind, the delay of one year in demolition for the potential of repurposing still makes sense.

Let’s move to today. I’ve already heard part of the “told you so” from those opposed to Chalmers. While they may ultimately predict the failure to repurpose Chalmers, I could not disagree more with their rationale. In my mind, the vision of a parking lot or of a cluster of shops entails similar levels of risk. I think my point on the Mall above emphasizes the inherent risks in this mindset.  More importantly, I’d argue that my view on the risk-reward of Chalmers repurposing is much better than building a cluster of retail shops at Via Ponte.

So where does this bring us? I still support repurposing Chalmers but my support is not indefinite or absolute.  Let’s be blunt: the difficulty with financing Mr. Kaufman faces in this economy is understood; the complexity of the project is understood; but in the end, Mr. Kaufman needs to demonstrate an ability to close the deal with Chalmers in light of not closing the deal so far. Whether this means the city needs to extend the option, acquire new investors, proceed with demolition, et al , remains to be seen as the economic parameters today differ markedly than those of last year. I’m curious to see the case for each recommendation.

I’d like to see Chalmers succeed, if not Chalmers then Via Ponte or whatever ,   succeed.  Success is worthy of celebration; celebrating failure much less so.

The real translation of the Pizza Hut in Italy commercial (contains adult language)

Pizza Hut in Italy

I missed this last week… As it relates to the negotiates sales tax agreement bringing the city an extra $500K (story here):

City 1st Ward Supervisor Vito “Butch” Greco, who did not attend Tuesday’s meeting, is one city supervisor who may not approve the agreement if it is brought up for a vote next week.

Greco said Wednesday that he doesn’t think the city should use its water to its benefit at the expense of the towns.

“Don’t hold it over our heads. Let’s work together to utilize the water, and the city should get paid fairly. Don’t use it because you’re financially crippled,” Greco said.

Maybe I’m missing something but why would a city supervisor –ostensibly representing the city– vote against a better agreement for the city?

I don’t get why the city should not share in the growth of the towns given the  vital role of its infrastructure toward contributing to that growth.  I also don’t understand why the city should not negotiate to its best advantage. I’m not saying that the deal is structured to only benefit the city; any sustainable deal needs to be mutually beneficial to all parties while still promoting your objectives and needs– that’s what negotiating is about.

Yesterday’s release of school performance data does little to help our local real estate market. In other words, yesterday’s announcement reduces demand for housing in our district and hence prices.

What’s less obvious is how the creation of the magnet schools and the lottery system for enrollment coupled with poor performance reports punish our real estate values. It’s all about risk and how the lottery system introduces more risk into your home buying decision. And the more risk you create, the lower your price must be to offset the risk.

Here’s how it works under the lottery scenario and how it works under the neighborhood school scenario.

Lottery Scenario

A young couple with school age children considers purchasing a home in the city. As the couple explores different homes in different parts of the city, they realize that regardless of where they move, they have no idea where their children will go to school as it’s lottery based. So as of now, they would face a 50% chance of sending their children to a school In Need of Improvement. As this uncertainty creates more risk to the buyer, they are not willing to pay as much for a given home as if the risk did not exist.

As every buyer in the city now faces this additional risk, every home in the city is subject to this risk-based reduction in price. Even worse, the demand for the better performing schools such as Barkley increases — parents would opt for the best performer– yet the supply of seats at Barkley remain fixed so more and more parents get shut out from their desired program. And as more parents get shut out, it creates more incentives to exit the district thereby reducing real estate demand and hence prices.

Neighborhood School Scenario

A young couple with school age children considers purchasing a home in the city. As the couple explores different homes in different parts of the city, they realize that the performance of the local schools differ. What they learn is that the stronger schools tend to be in areas with higher property values due to higher demand for the stronger schools while the non-performing schools tend to reflect lower property values.

For example, we’d expect neighborhoods with schools such as Barkley with better test scores to  command a higher price than comparable areas. Under this scenario, the buyers can mitigate their risk by paying a higher price if they choose to live in the Barkley district. As a result, real estate owners in Barkley would benefit from a strong school with higher home values and appreciation.

The underlying economics and market dynamics of the above scenarios could not be more different in terms of economic outcomes and market incentives/disincentives. Think about it: the relationship between real estate values and quality of school programs is well established; just ask any realtor. The current lottery-based approach does nothing but universally depress real estate values with no escape from its disincentives and counter-market rationale. Regrettably the only escape is packing up and leaving.

PS I may be opening myself to criticism as an elitist (not the first time). I’m not arguing for gated communities or gated schools; I’m arguing that we create the right market and economic forces to drive real estate values and growth to our area while building strong academic programs.  I don’t think that’s elitism, I think it’s simple economics and academics.