Homeowners foolish to criticize property tax protection

Homeowners in many parts of the country have seen the market value of their homes double in the past several years. Can this significant rise in value be a bad thing? It can if property taxes increase unchecked.

But some states have protections in place to keep property tax increases modest, even if home price appreciation is not. This was designed to keep a skyrocketing housing market -- like the one currently being experienced -- from pricing homeowners out of their homes.

The idea is to protect homeowners, especially those living on a fixed income, from an out-of-pocket expense such as property taxes rising at a pace far faster than household earnings. The pioneer of such legislation was California, passing Proposition 13 amid a housing boom in 1978 to limit annual property tax increases. Proposition 13 accomplished this by both capping the tax rate and limiting the increase in assessed value each year.

The state of Florida has an initiative known as Save Our Homes that contains the increases in the assessed value of homes to 3 percent annually, regardless of how much the homes have appreciated. Florida homeowners have seen scant increases in property taxes despite soaring home prices in the past few years. Sounds like a winner, right? Apparently some people can still find a reason to complain.

Why? Some homeowners are bemoaning the fact that they cannot parlay their current equity stake into a larger, more expensive home without a substantial increase in property taxes. Provisions that cap the increase in home assessments protect current homeowners, but upon sale of the property, the home is reassessed based upon the market value. As a result, home buyers pay drastically different property taxes than the home seller, particularly if the seller owned the home for more than the past four years, when prices increased so sharply.

Which brings us back to the issue that has ruffled the feathers of some homeowners -- the inability to upgrade without a marked increase in property taxes.

Look at the first sentence from a March 27 Palm Beach Post article profiling some of those homeowners: "In a housing market this hot, someone was bound to get burned."

Are you kidding me?

Imagine for a moment that a rich uncle sells you a fancy three-year old Ferrari for $500. After driving around town in this Ferrari for a couple years, you develop a hankering for a new Ferrari. But there is one minor sticking point -- you can't afford it. Do you curse your uncle for saddling you with this ride that only whets your appetite for an upgrade you cannot afford? Or do you count your blessings at being able to drive such a fine automobile when others cannot? After all, you're not getting ripped off by having to pay the going rate for the new Ferrari. You instead reaped the rewards of not having to pay full price for the first one.

From a financial perspective, the average American household is characterized as saving little or no money each month, undercontributing to retirement savings via IRAs and 401(k) accounts, and using the home as an ATM by tapping into the accumulated equity as if it were a sudden windfall.

The latter item is more of a recent phenomenon as people have increasingly come to view the real estate market as the latest "Get Rich Quick" vehicle. Homeowners are also prone to leverage existing equity and future earnings to take on larger homes in the mistaken belief that recent appreciation is representative of future returns.

With the sorry state of household savings and the reliance on borrowing, having some accumulated wealth in the form of home equity isn't a bad thing. Nor is the prospect of staying in the home and accumulating additional equity over the years, due to principal repayment and further appreciation. After all, home equity is the largest component of household wealth entering retirement.

How unfortunate that legislation designed to keep homeowners in their homes is decried when it prevents people from biting off more than they can chew.

Can you imagine the bellyaching if property tax bills climbed 25 or 30 percent each year for several years in a row without such legislation? States without such protection for homeowners have come under pressure to pass it, and with good reason. All the while, those with such protection are grumbling because it prevents them from digging a deeper hole. Everyone should be so lucky.