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Originally posted at http://thehenrygeorgeblog.blogspot.com/

Write your local congressman and ask them for Land Value Tax reform.

As I've blogged about previously, all major economic downturns follow a specific pattern and this pattern is driven by the speculation of land.

Cont

In the news this past week talking about land speculation:

Shiller: Real estate is risky business

"In justifying his pessimism, he pointed out that price increases have far out paced rises in construction costs, rents and income. In addition, inventory levels are up, as are interest rates and real estate holdings as a percentage of the gross national product"

and

"This latest one, says Shiller, is a speculative boom. "It's an uncertain situation," he says. "It looks like a down cycle that might continue down or it may bounce around. I will not make a forecast but this pattern suggests risk."

Real estate boom grows

"Just two weeks into the month, the average cost of a home in Calgary has skyrocketed more than $16,000, earning the typical local homeowner over $1,150 a day in June."

The analysts seem to be in happy go lucky denial

"During the record-setting months of April and May, residential realty increased an average of $500 a day, but the latest figures indicate prices are climbing at rates never seen before.

"The real estate market is completely reflective of the economy," said CREB president Kevin Clark.

"I'd be surprised if this wasn't happening."

As well as Harvard analysts

Housing boom 2.0

The study rides on a major and wrong assumption: that value in home appreciation is permanent.

Booming household growth. The nation will add 1.37 million new households this year. Part of this is natural population increase but this has also been bolstered by foreign migrants.

And then

The Harvard researchers downplay the risk in mortgages with adjustable rates and easy downpayment requirements. Those loans introduce uncertainty, some worry: if interest rates rise, owners could find themselves with much higher monthly payments and that could result in a big jump in foreclosures and forced sales, adding to home inventory and hurting prices.

The Harvard researchers don't expect that to happen, though. Most owners with risky loans have already seen their home values grow substantially. "Having significant home equity is the best protection against foreclosure because homeowners can sell at a profit if they cannot cover their mortgage payments."

As the rate of construction increases, this will drive down the marginal rate of rent. With increasing interest rates  and decreasing rental value the opportunity cost of owning real estate will become greater. Investors will leave the housing market depressing the value of homes. When the marginal AIM mortgage owners begin to default, this will spiral out of control and where it stops no one knows.

The Harvard study goes on to say:

"Even if home prices fall in the next few years, the drops are unlikely to erase all the equity of the great majority of homeowners, the Harvard researchers predict. And the interest rate declines that usually accompany such price drops would enable many borrowers to refinance their homes at favorable terms. All this should help prevent large price drops."

Those who were on the margin will default and those who were near the margin will suddenly be on the margin. With a major amount of defaults the available amount of credit will dry up and banks will be much more hesitant to lend out new funds and those new marginal players will suddenly find themselves in a tight position. With the inevitable dry up of new construction, and with it the jobs, will come an economic downturn.

Speculation in companies who specialize in construction have lost half of their value

Housing's engine -- low rates -- losing steam

"Stocks in the sector have fallen dramatically. Hovnanian, for instance, is trading near $30 a share, down from its 52-week high of $73.40. Rival Toll Brothers trades around $27 a share, down from a 52-week high of $58.67."

and projects are now being cancelled

"Developers have started canceling projects. Plans were scrapped last week for a 4,400-unit Las Vegas condo resort complex that had been backed by actor George Clooney and nightclub owner Rande Gerber. The development company for the project said rising construction costs and slow sales forced it to rethink the plan."

As I blogged about previously, one of the big indicators that we are near a sudden land market crash is when land speculators start buying large tracts of undeveloped land.

What's really happening on 13th Street?

"The other jaw of the vise is represented by private developers who have been attracted to the street by relatively inexpensive property that has a million-dollar view overlooking Newport's basin with a Cincinnati skyline that could have been painted as a backdrop for a Hollywood set."

And finally, to close this:

U.S. housing boom is biggest since 1890

"Increase in home prices may have been psychological, economist says"

And what happened just after that real estate mania?

Panic of 1893

Write your congressmen and help me compile a list of politicians at my blog who are LVT friendly and will work towards an LVT future.

Originally posted to eire1130 on Sat Jun 17, 2006 at 12:49 PM PDT.

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Comment Preferences

  •  Really scary (5+ / 0-)

    I found the link to the "Panic of 1893" of particular interest.  Those unemployment numbers are truly terrifying.  I'm no economist but this information coming out points to some kind of downturn that will likely ripple through the whole economy, especially when coupled with the rise in energy prices.

    "Change is inevitable. Growth is optional."

    by Land of Lincoln Dem on Sat Jun 17, 2006 at 01:03:09 PM PDT

  •  On one spring weekend in 1933 (8+ / 0-)

    1/4 of the land in the state of Mississippi was on the auction block.  

    Another historical factoid on how far down a real estate crash can go.  

    'Events are in the saddle and ride mankind.' Emerson

    by deepsouthdoug on Sat Jun 17, 2006 at 01:11:20 PM PDT

  •  you'll have to do a lot better than this to make (1+ / 0-)
    Recommended by:
    baba durag
    any headway.

    The idea that "land tax is the only tax that isn't theft" or that shifting all tax burden to land will solve all the world's problems seems to be pretty fringe analysis.

    land value cycles happen every 10-15 years.  They don't all end in disaster.  Pretty hysterical stuff.

  •  One Century of House Values Graphed (5+ / 0-)


    Click to enlarge. From NY Times.

    We are called to speak for the weak, for the voiceless, for victims of our nation and for those it calls enemy....--ML King, "Beyond Vietnam"

    by Gooserock on Sat Jun 17, 2006 at 01:52:03 PM PDT

    •  global warming (1+ / 0-)
      Recommended by:
      Pumpkinlove

      The increase in house prices is clearly the result of global warming. Or the decrease in the number of pirates...

      and what will happen to the HUGE million dollar mcmansions that are metastisizing throuhgout my neighborhood when people can't afford to heat them?

  •  I absolutely love the idea (5+ / 0-)

    of relying primarily on land value taxes for gov't income. The nice thing about a LVT instead of property taxes IMO is that you pay tax (if I understand correctly) based on the property, and now what you build on it. Thus, you will be encouraged to:

    • Not buy vacant property and leave it vacant.
    • Fully utilize properties you have.

    Thus if there is a property available downtown, if the main cost is LVT, the best option is to build a high-rise development, as the tax would be the same if you paved over the lot for parking, yet your income would be much, much higher. Thus it encourages dense development and discourages sprawl.

    Supposedly Hong Kong has a LVT, and they have some of the highest density population centers next to green forests. It's a model of good land use.

    You cannot depend upon American institutions to function without pressure. --MLK Jr.

    by Opakapaka on Sat Jun 17, 2006 at 01:58:49 PM PDT

  •  Totally disagree... (2+ / 0-)
    Recommended by:
    Pumpkinlove, Kujo AAR

    How would a policy that makes land worth less money keep this real estate bubble going?  Further, is keeping the real estate bubble going a wise policy decision?

    I think a crash is inevitable, and the sooner and quicker the better.

    I'm so metal I have the unlisted Number of the Beast.

    by MjrMjr on Sat Jun 17, 2006 at 02:30:23 PM PDT

    •  I am not... (0+ / 0-)

      ...advocating any sort of land speculation and part of that would be a "real estate bubble".

      An LVT, if implpiminted now, would prevent a major crash, although it would also stop the wild speculation.

      It would prevent a crash because it would cause underused land to be used for its most efficient use (see above comment) and it would stop speculation because it would force investors to use land to its maximum potential at all times.

      •  Crash ought not be prevented (4+ / 0-)
        Recommended by:
        rgilly, eire1130, Pumpkinlove, Kujo AAR

        I'm familiar with the argument that an LVT would push owner to use the land most efficiently.  Make them bear the true opportunity cost, so to speak.  I like that aspect.

        A couple other questions/considerations, however....  what would an LVT do to property taxes for the average homeowner?  Would they go up, down, or stay the same?  Remember, if the answer is "go up" then property values will go down.  Second, in a lot of areas the major factor which determines land values is zoning laws.  I live in a suburb of DC and there's places around here that are zoned for 1 house per 5 acres.  And each 5 acre lot has 1 house on it.  You could tax that 5 acre lot as if it "ought" to have 5 or 10 houses rather than 1 on it but unless you change zoning laws according that won't happen.  

        I'll again make the case that a crash needs to happen.  There's many areas of the country where houses have appreciated over 100% in the last 5 yrs and a two income family making the median household income can't afford to buy a house.  Prices are out of line with fundamentals.  These aren't dot com stocks or tulip bulbs, a house is something a family needs to live in.

        The crash is already underway.  Speculators are already running for the exits.  Do a little research on what's happened to MLS inventory in the hot housing markets over the last year.  We don't need to change anything midstream.  The time to implement a major change is after house prices revert to their fundamentals.  All imo.

        I'm so metal I have the unlisted Number of the Beast.

        by MjrMjr on Sat Jun 17, 2006 at 05:08:37 PM PDT

        [ Parent ]

        •  I honestly don't know... (0+ / 0-)

          ...if LVT would prevent a crash. That is based on best predictions. That said, for the average home owner, they would notice their taxes go down as chronicled by the Maryland land value tax project.

          But, I think you still have a valid point, one which I'll need to research a bit more for my own pleasure.

          As far as zoning, zoning is much a pressure from local constituents as it is the politicians. People, who want to "keep out" lower income folk, just make the lot size larger. This happens all the time around where I live, north of NYC. Usually this is billed as preserving wilderness or some such non-sense. I'll agree that zoning is an obstacle, but I also think the voting public will vote to change the zoning laws after an LVT is implemented.

          At any rate, I'm glad that you seem down with the LVT, even if we may disagree on some of the nitty gritty portions.

          •  Modern manorialism... (1+ / 0-)
            Recommended by:
            eire1130
            the wealthy industrialists/professionals live in the McMansions in the exurbs. These people control the high-touch symbolic tools and services that modern society demands...for which they charge a rent for in their commute-to workshops in the ring suburbs and cities.

            People in Eurasia on the brink of oppression: I hope it's gonna be alright... Pet Shop Boys: Introspective

            by rgilly on Sun Jun 18, 2006 at 05:48:55 AM PDT

            [ Parent ]

  •  Let it crash (0+ / 0-)

    When we make a six figure income and can't afford the small, older homes in my town without a dangerous mortgage, there is something wrong.

    There is no excuse for a 1000  sq. foot home to cost 250,000 in the mid west.

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