Tuesday, July 12, 2005

Visit To Tear-Down City, or "Even If This Isn't A Bubble, You People Are Still Crazy"

by Tom Bozzo

Perhaps the most interesting part of last week's trip to Washington was an excursion to Bethesda, Maryland to see the house newly purchased by one of my former Terponomics friends. It's a brick colonial typical of 1940s suburban development: nice lot, no garage, pathetic kitchen, 3 bedrooms, 1.5 bathrooms, 1500 square feet or so above ground, now priced just north of $800,000 — around double my neighborhood's going rate (compare, e.g., here).

This presents a certain etiquette challenge, of which I've also seen the flip side (*). This is where the yokel from more-or-less outside the bubble (me) is challenged to react to the features, or lack thereof, of the insanely expensive house. Things were made easier for me as I was given advance warning of the kitchen. Still, none of the choices are good, including:
  1. Laughing nervously and/or inappropriately;
  2. Imagining life with twice the mortgage, fainting;
  3. Pointing out what $800,000 will buy in yokel-ville;
  4. Noting impending end of world, screaming.
I mostly stuck with #1, though my friend's disquisition on their interest-only ARM nudged me towards #2 and #4 a couple of times.

Not surprisingly, these modest but very expensive houses are prime tear-down candidates. Indeed, a number of nearby McMansions of obviously recent vintage have either engulfed or entirely replaced the neighborhood's original dwellings, providing the week's observation of the undertaxation of the rich.

Differential local taxes have a measurable, if not a dominant, effect on relative housing affordability. Madison mill rates are about twice those in that part of Bethesda — our assessments respond more quickly to market transactions, too — and Madison taxes on an $800,000 house would be around $730/month more at the full market price assessment. That would pay the interest on nearly $170,000-worth of interest-only ARM, or around $130,000 in a fixed-rate loan. The upshot for payment-chasers is that the gross payment would be the roughly same for a Madison house and a Bethesda house (not necessarily comparable) priced 15-20 percent higher, depending on the financing details.

Before would-be Wisconsin property tax avoiders start packing their bags, note that Maryland has local income taxes. Note that I would consider it fairer to raise a given levy with income taxes rather than with property taxes. Of course, that's not on the table in property tax "relief" discussions here.


(*) My grandmother's neighborhood in Syracuse is very similar to Madison's near west side neighborhoods, but since upstate New York has become a much less desirable place to freeze for several months of the year than south central Wisconsin, their price levels are roughly half ours.
This comment has been removed by a blog administrator.
Tetricus, curious as to why you removed the comment.

I was going to say that you are feeling the tax incentives favoring homeownership. In some coastal markets where house prices have soared relative to rents, though, some people may be better off renting -- esp. if the price gains come to a halt, or worse.
I'm in the bubble but still found myself having to resort to option #5 -- change the conversation to something other than the house like convenience and schools. Kind of like seeing an ugly baby & saying what nice eyes it has.
Yes, that house does have location, location, and location.

I *was* mildly stunned to see the prices that houses in the north end of University Park are commanding.
There are a lot of people moving up -- when small colonials like mine fetch 400-475k (!) it seems reasonable to pay 500-700k for a 'prestige' property.
Cathy B. identifies a reason the bubble has kept growing. So long as the cities have appreciated faster than the sub/exurbs, "moving out" provides only the incremental cost.

I have several neighbors would paid $xxx,xxx more than we did for our house--but they "made" that much (or more) when they sold their co-ops in NYC (incl. Brooklyn).

Even now, I could move a few towns further out and be within a few thousand of breaking even, with a slightly larger property, net of moving expenses and sunk costs. This can continue until (a) the center ceases to appreciate or (b) people decide the trade-off of the longer distance is too much.
Can I just say . . . eek.

My wife and I often talk about moving away from Milwaukee--where we bought more house than your friend for 1/7 the cost--to someplace cooler. She has an opportunity, for example, to move us to the San Francisco area.

But on my public school teacher's salary and her health researcher salary, we would never make it. Two middle-class professionals priced out of the market . . .

Did you see the report recently that something like 40% of recent job growth is directly attributable to the bubble? From construction to housing to Home Depot. When that puppy blows, I don't want to imagine what will happen.
Well I was going to leave it but I knew Bryan would jump all over me for not mentioning that only my last dollar that falls within each specific tax bracket is taxed, but I didn't feel like writing a small essay on the tax system. Sorry I wish blogger would let the comment space-holder dissapear too.
I am as poised as ever to tear you up, tetricus ;) - as if I actually could though.

I just hope I can graduate and sell my house before the bubble pops.
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