To own or rent: the property tax wildcard

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switters's picture
switters
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To own or rent: the property tax wildcard

I've been reading some of Stoneleigh's old posts over at The Automatic Earth.  IMO, she is one of the few commentators (like Chris) who understands the inexorable connection between energy, economics and environment and how the crises we're facing in each of these areas are likely to converge.

Most readers here will be familiar with her recommendations for how to prepare for the coming times: store food and other necessities, put aside cash, don't trust the banking system, build community, reduce your dependence on oil, etc.  However, there was one piece of advise that surprised me somewhat.  She suggests that those who aren't able to own a home outright (the vast majority of the population, in other words) would be far better off renting.  But even owning a home free and clear may not be safe, as she explains:

Even those who own homes free and clear will find that, in a frozen property market, they can not move to where the jobs are, or to a more suitable property with some self-sufficiency potential.  If they lose their jobs, they may lose their homes through being unable to pay the sky-rocketing property taxes that municipalities will introduce in a desperate attempt to fill the gaping holes in their own budgets.

In her opinion, renting is a much better option for most people. 

Rents will fall a long way in deflation, and although landlord default is always a possibility (perhaps meaning more than one move), that risk is preferable to losing the bulk of one's assets in a property collapse.  Renting is essentially paying someone else a fee to take the property price risk for you, which is a very good bet during a real estate crash.  It would also allow access to liquidity.

And why is access to liquidity so important?

When interest rates spike, not only will debt become a millstone around your neck, but a debt-junkie government forced to pay very high rates will be in the same position.  As a result government spending will have to be cut drastically, withdrawing the social safety net just as it is most needed.  In practical terms, this means being on your own in a pay-as-you-go world.  You do NOT want to face this eventuality with no money.

If one's savings is entirely tied up in their mortgage, then they would have no access to liquidity and they'd be in exactly the position Stoneleigh is advising people to avoid.

Since I've lately been considering buying a home, these issues have been much on my mind.  Mostly I've been thinking about when the market is likely to bottom and how close or far we are from that point.  Of course I want to pay as little as possible so I have the smallest possible mortgage.  But Stoneleigh raises another excellent point which had slipped into the back of my mind, which is the very real possibility of a huge spike in property taxes in order to make up for budget shortfalls at the municipal level.  

One thing she doesn't address, however, is the relative instability of renting vs. owning when it comes to building self-sufficiency.  For example, we're renting a place right now in a pretty urban area.  We've got a big garden with vegetables, medicinal herbs and a couple of fruit trees.  We just built a chicken coop and are raising 9 chicks for eggs.  An obvious next step is to become more energy and water independent.  But how much sense does it to build an extensive rainwater catchment system and install solar panels when we could get kicked out of our house any time due to a landlord default (which I happen to know is a real risk for our landlord)?

Also, if one is moving around from one rental to another it can be very difficult to build meaningful community.  I believe that being part of a strong community is probably the single most important factor in increasing our resilience.  Renting makes this much more difficult.

I have become increasingly split on this question.  I can see the arguments for both owning and renting clearly, but I'm still unsure as to what is the best course for me.  I'd be curious to hear how you all are approaching this question.

 

 

jerry_lee's picture
jerry_lee
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Re: To own or rent: the property tax wildcard

Thanks for raising the question, Switters. I was just having this same discussion with my wife at dinner. We've been looking at houses this week, with the thought of buying a lower priced home and thus lowering our monthly payment. We could probably reduce our payments by 35% plus owe considerably less.

But, the only way we could own a home outright would be to buy something we wouldn't be real happy about.

I just told her that selling our house and renting for awhile, until prices fall some more, may make it possible to own without a mortgage.

I agree with you about  community needing to be at the top of all considerations.

The point about rapidly increasing property taxes seems really important,too. I hadn't given that much thought.

The other point made by Stoneleigh re: 'a pay-as-you-go' world also gives me pause.

I don't know that I have anything new for you to consider....you've done a good job of giving me something more to think about.

joemanc's picture
joemanc
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Re: To own or rent: the property tax wildcard

Switters,

I'm currently renting an apartment but am looking to buy a house with land sometime early next year. While I believe the market bottom for housing may not be until 2011, at least in my area of the world, I think it's more important to get a step ahead and get the land while it's still available. You never know when the SWHTF and then there is a rush for that land. That said, unless I can pay for my home in cash while leaving a comfortable savings cushion, I plan to buy a home with a minimal downpayment and ultimately(hopefully) pay off the remaining mortage within a few years with my savings. At least, that's the plan for now.

Cloudfire's picture
Cloudfire
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Hedging Property Tax Hikes

 

Hi, Switters;

One possible hedge against rising property taxes might be raising food to be sold locally  . . .  Chances are that food will rise in $$, along with property taxes. . . Also, if your home is energy efficient (solar, wood stoves, etc.), with gardens well developed, and water catchment in place, then I would say that it would remain relatively saleable (and, relative to the market, increase in value), which provides a possible way to get out if property taxes rise to unpayable levels.

I think it unlikely that property taxes would rise to levels that drive persons who are otherwise debt-free out of their homes, and into the streets . . . That would seem the route to riots-in-the-streets . . . . If persons who signed on to unpayable mortgages lose their homes, at least subliminally, they would blame themselves (and so would I) . . . If persons who have behaved fiscally responibly lose their homes to a corrupt governmental system that caused all the problems in the first place, well, that's another kettle of fish . . . And likely to trigger pitchfork-style revolution . . . .

So, if one can own outright, and one manages that property properly, relative to our predicament, I think that situation is preferable to the uncertainty of renting . . . If I had only a moderate amount of free cash, I'd buy land, and live in a shack, if I had to, but develop energy, water, and food self-sufficiency, in the meantime.  Gungnir and Plickety spring to mind. . . Sure, they're going to put in a tough coupla years . . . but, I'll wager their property taxes are waaay cheaper than dirt . . . Some years ago, we had friends who pulled up stakes in our rapidly developing far-suburban area, bought land in undeveloped Idaho, and lived in a trailer for a year, while they built the house and peripherals.  He had building experience, but really, those are skills that any reasonably handy chap with minimal financial management skills can develop.  The whole thing worked out quite nicely for them  . . .

 

EndGamePlayer's picture
EndGamePlayer
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Re: To own or rent: the property tax wildcard

I agree C1ouldfire -   It's really scarey to think how much property taxes will be going up in the future. Ours has been getting raised at a rate of 20% for 3 years in a row! So we sold it to buy down. You have to be really rich in this world - or really poor . . . every one in-between gets screVVed.

switters's picture
switters
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Re: To own or rent: the property tax wildcard

Just to be clear, there's absolutely no chance of me buying a house free and clear in the near future.  I will be one of those folks with a mortgage if I do decide to buy, which Stoneleigh advises against.  But I'm not sure she is giving enough weight to how home ownership facilitates building community and sustainability.  You make a good point, C1oudfire: if property taxes do skyrocket to the point where even responsible homeowners can't afford their mortgages, then we're going to be at the precipice of a populist revolt - if not in one.  At that point there would be so few buyers that could actually afford the homes that it would make little sense to foreclose on people who are in them.  

Cloudfire's picture
Cloudfire
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Hopping over the Property Tax Trap
switters wrote:

Just to be clear, there's absolutely no chance of me buying a house free and clear in the near future.  I will be one of those folks with a mortgage if I do decide to buy, which Stoneleigh advises against.  But I'm not sure she is giving enough weight to how home ownership facilitates building community and sustainability.  You make a good point, C1oudfire: if property taxes do skyrocket to the point where even responsible homeowners can't afford their mortgages, then we're going to be at the precipice of a populist revolt - if not in one.  At that point there would be so few buyers that could actually afford the homes that it would make little sense to foreclose on people who are in them.  

I'd go high on land, minimal on living space, and focus on sustainability . . . and protecting what we have with security measures, including the appropriate "tools", and by building relationships with those immediately around us, and with the community at large.  That seems to me to be the safest route for those of us without both unlimited funds and the expertise to dance our way around the markets.

 

JAG's picture
JAG
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Re: To own or rent: the property tax wildcard

Hi Switters,

My wife and I own our home outright, so our only expenses are home insurance, wind-storm (hurricane) insurance, and property taxes. These expenses alone amount to more than what we paid in rent prior to building our house. To our delight however, our property taxes actually dropped by 30% this year, reflecting a 30% official devaluation of our (6 year old) home value. This was a real surprise, because our region didn't really participate in the housing bubble (or crash).

While we rented prior to building our house, I bought the land (1/2 acre) and started to plant citrus trees on it. I also built a small greenhouse/shade house on it for growing vegetables. Perhaps, you could do something similar:

  • Buy a lot and begin your gardens and orchards. Taxes on your "unimproved" lot should be very reasonable.
  • Continue to rent in the meantime.
  • When the local housing market has reached the bottom, build your house with the very cheap labor of a desperate local construction industry. 

 

 

 

switters's picture
switters
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Re: To own or rent: the property tax wildcard

Two very interesting articles over at Charles Hugh Smith's blog on housing / real estate:

Housing Recovery: Sell Now Or Your Capital Will Be Trapped

More on Capital Traps, Buying, Holding and Selling Housing

Worth a read and some discussion!

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