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alstry (35.66)

The Next Tsunami? Municipal Defaults

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June 02, 2008 – Comments (8)

Think the Economy Is Bad? Wait Till the States Cut Back 
New York Times 
 
State and city governments have yet to shrink the economy; indeed, they have even managed to prop it up. They have quietly maintained their spending at pre-crisis levels even as they warn of numerous cutbacks forced on them by declining tax revenues. The cutbacks, however, are written into budgets for a fiscal year that begins on July 1, a month away. In the meantime the states and cities, often drawing on rainy-day savings, have carried their share of the load for the national economy.

 

The above is an issue that concerns me a lot.  As property values fall so to tax receipts.  As profits fall so do tax receipts.  As building slows so does usage and permit fees.  As sales slow, so do sales tax receipts.

The problem is most municipalities budgeted for rising revenues and borrowed and spent accordingly.  Most have had their head in the sand about the reality of falling revenues.  Very shortly, that reality is about to smack them in the face. 

I am not sure we have ever had period where government was so leveraged and revenues slowed so dramtically.   Quite frankly, I am not sure how we solve this one short of mass governmental bankruptcies.

8 Comments – Post Your Own

#1) On June 02, 2008 at 9:24 AM, alstry (35.66) wrote:

CAN A HOUSE BE WORTH LESS THAN $ZERO?

I just got off the phone with an individual who I consider a very good friend on one of the best real estate investors I know.  A few years ago, I told him that by the time this mess was at bottom, you would be able to buy a million dollar condo in Florida for less than $100K.  At the time he thought I was nuts, he still thinks I am nuts, just a little less than before.

Then our converation this morning.  He owns a vacation home in Michigan on the lake.  He paid less than $2 million dollars for the house but his property taxes are $54K per years as the home is non homestead.  Most homes in his area are second homes.....at least the homes that people find desireable.

This is when the light turned on when I asked this question......What percentage of the American population could afford your home if you gave it to them for free?  He owns the home free and clear and we estimated his monthly expenses at around $7K for maintenance and taxes and utilities.....and that is with the house shut down for the winter.

He thought about it.....and realized very very few.  When cash was flowing and everyone was borrowing, things were flush.  Now that credit is cut off, money is becoming harder and harder to come by.  Banks are becoming more and more desperate to sell.  The Times had an article yesterday how the "wealthy" are quietly pawning jewelery.  If the "wealthy" are pawning personal effects, they can't afford $7K per month on a second home after it is fully paid.

This brings us back to the taxes.  At $4500 month, the state of Michigan depends on that revenue to support its budget.  If it cut taxes to levels where it was affordable for homeowners, the states revenues would implode and likely default on its bonds as well as drastically cut back on services.

So back to the house, even if you gave that house to most people for FREE, most would hand the keys right back to you until the taxes and maintenance reached more affordable levels.

Incomes either have to skyrocket or costs have to come way way down.....you pick.

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#2) On June 02, 2008 at 9:36 AM, dwot (99.56) wrote:

Excellent reasoning with your friend.  I know what you mean that people just don't get it when all the information is there and if you just think it through...

This one was timely.  I've been thinking about a housing investment, partly because housing is very tight where I am.  I have had a couple some what stressful months with wondering where I'm going to live.  I kid you not, two options I've been looking at the owners want to stay there when they are in town and the rent is high.  By the time you pay utilities you'd be looking at close to $2k per month - that and just having someone come stay with you?

 

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#3) On June 02, 2008 at 10:25 AM, mandrake66 (94.95) wrote:

The Times had an article yesterday how the "wealthy" are quietly pawning jewelery.  If the "wealthy" are pawning personal effects, they can't afford $7K per month on a second home after it is fully paid.

The words "wealthy" and "affluent" are usually applied to people based on where they live, and how many expensive goods they flaunt. They're usually not very wealthy at all. 

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#4) On June 02, 2008 at 11:02 AM, alstry (35.66) wrote:

Often it is based on income and not cash in the bank.  The problem right now is revenues are shrinking for many.  Government, Business, and Individuals.

Without revenue, you can't afford to service debt....or at least after your savings runs out.  When you can't service debt you default.  When you default you create distressed inventory negatively impacting the value of similar assets.

As the value of assets decline, even the "wealthy" become less wealthy.

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#5) On June 02, 2008 at 11:13 AM, eldemonio (98.84) wrote:

Municipalities are reluctant to reset property values because they want to maintain property taxes at current levels.  Unfortunately, many home buyers aren't too thrilled about paying property taxes on a home valued at $400,000 when they buy it for $250,000. 

To encourage more home buyers to move into their cities, many municipalities will have to reassess home values, thereby decreasing their property tax revenue.  With less money coming in - something's got to give.

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#6) On June 02, 2008 at 11:23 AM, mandrake66 (94.95) wrote:

And people aren't too enthusiastic about snatching up foreclosures for $5K or $10K when they have to pay taxes on assessed values many times that.

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#7) On June 02, 2008 at 1:59 PM, jesusfreakinco (29.61) wrote:

Al,

Good stuff as usual.  You don't often hear the thanks, but keep posting.   You bring up some good things to think about :)

Long gold, short, HBs, finls and about everything else...

You need to add some gold positions to your CAPS account :)

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#8) On June 02, 2008 at 4:28 PM, alstry (35.66) wrote:

Thanks,

I do see an incredible trend developing.  It seems in surveying a bunch people I know, revenues are seemingly becoming harder and harder to come by.

For those without much debt, no big deal as savings can mind the gap comfortably.  But for those without much savings, it is becoming increasingly stressful.

The issue now is how leveraged is our society and much are revenues contracting.  This weeks retail numbers should give us some pretty interesting insight.

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