Marginal Utility

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.

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(*) 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.