Thursday, December 25, 2008

Real estate is no good in New York

From the 29 December 2008 Greater Niagara Newspapers

By Bob Confer

Despite the bursting of the housing bubble, real estate remains one of the smartest investments to make in most of the US. The deepening recession that we’re in is a direct result of an inordinate number of foreclosures in places like California and Nevada where totally-unrealistic home prices finally reached their apex and tanked, taking the homeowners (investors) with them. Only after this caused the financial markets to crash did foreclosures see a slight increase in Western New York. As employers who were affected by the recession cut jobs, many local homeowners, now jobless, found it impossible to keep up with their mortgages.

It’s a study in contrasts: While the foreclosures elsewhere in the US were the direct result of the collective ignorance of gambling homebuyers and the risk-taking banks who lent money to the unlendable, here, in WNY, lost homes were not the result of such ignorance but, instead, were mostly the result of issues beyond anyone’s control.

Because of that and for the fact that at first glance our region’s recessionary woes don’t come close to those of the other locales, WNY’s civic leaders – elected officials, businessmen and news outlets alike – have been wearing this like a badge of honor. They claim that we weathered the burst of the housing bubble and we are in no way responsible for what befell America.

Maybe so, but such glee is quite misguided and it hides the real truth, which is even more horrible than fiscal mismanagement by homeowners. The fact of the matter is we did not have a housing bubble – nor will we ever have one – because New York is one of the few states in the Union in which real estate is not a wise investment. That’s because our elected officials, not our citizens, have for decades mismanaged finances. They have made, and continue to make, property taxes that are much too high. The onerous amalgamation of local, county, and school taxes have stripped real estate of any future returns it might have.

Consider the following…

In Niagara County the median home value is $95,800 and the property tax burden on said home is $2,800. Suppose someone buys that home as a starter home and hopes to sell it off in a decade or two. To come out even, based on taxes-paid alone, he would have to sell that home for $123,800 after 10 or $151,800 after 20 years. That’s completely impossible in the Buffalo-Niagara region. Making matters worse, this basic analysis makes two major assumptions: One, taxes won’t rise in every one of those years and, two, he will put absolutely no money into that home (like remodeling or repairs). Those unaccounted-for factors – both of them 100% guaranteed to happen – have the lack of a payback on housing set in stone.

This is a uniquely-NY problem. Property taxes in the Empire State are 57% higher than the national average. For every $100 other Americans pay, we pay $157. And that’s the average; let’s look at one of the extremes. Recently I was visited by a customer from Tennessee. He pays a paltry $660 per year in property taxes for his 2,800-square-foot suburban new-build. In comparison, my coworker in North Tonawanda has a similar home for which he pays $6,800 in taxes annually. Another coworker pays $5,480 on his like-sized abode in Amherst. Think about it: they will have paid $68,000 and $54,800 in property taxes, respectively, after just 10 years. They will never make that up in resale value. Never. But, the Man From Tennessee will for sure. For him, and many other Americans, it makes complete sense to invest in real estate, be it housing or land, because their taxes are so low.

This takes on greater meaning now that we’ve all lost faith in the stock market. As 401(k)’s and pensions have plummeted, we’ve all looked for other options to save for our retirements and our heirs, things like hard assets such as gold, cash or real estate. Only in New York State is the latter an even poorer investment than a down market. Main Street, NY is absolutely no better than Wall Street, NY. It’s depressing because our homes are the single largest investment that we will ever make in our lifetimes.

Let’s put this into historical perspective. A tea tax, but a pittance, was the straw that broke our colonial backs and jumpstarted the American Revolution. Our property taxes are far more extravagant. Will that someday ignite that same fire of change in New Yorkers? Let’s hope so, and soon. We’ll never be a rich people as long as the depressing status quo is maintained in local and state leadership.

1 comment:

Anonymous said...

Bob- this is an excellent article which I wish more New Yorkers would read so they don't fool themselves into thinking real estate is something to invest in, here in crazy high taxed New York. My financial advisor told me the same thing as your article. Taxes are just too high for the generally older, uglier, dumpier, draftier homes we have around here. If I moved to a Southern state, I could have a newer, fresher home with "$660" in property taxes versus "$6,800" -- it's a no brainer-- I am convinced that if given the chance and people had no ties to WNY (ie. no family), they'd be smart to move elsewhere to have a life. Shoot, I can name dozens of friends and family who have fled to Florida, NC, CA, MA, PA, etc. It's getting to the point where all I have in the area is my parents and a few friends. Perhaps it's time to think about moving away.