The Effect of Proposition 13 On the California Real Estate Market

A friend of mine pulled a graph from an old story in the Orange County register where they predicted that home prices were expected to fall in 2007. (Well I did say it was an old story, dated 19 October 2006.

What I found interesting was the graphic, what we can learn from it with a bit more data:

Ignoring the obvious, that they underestimated the drop like every other real estate ad supported media entity, we can learn something about the effect of Proposition 13 on the California real estate market.

Proposition 13, passed in 1987, says that a house can only be taxed at 1% of property evaluation, and that absent a sale, that the evaluation can not increase by more than 2% per year.

So that $62,290.00 house in 1977 would now be assessed, absent any intervening sale, at $112,830.00 in 2007, while the true market value would $550,000.00 in 2007.

Truth be told, it would probably be less, if just because houses are getting bigger (McMansions), so let's call it $508,000.00.

So if you stay in the house, and improve it, and don't down size it, and leave it to your kids, right now you will be paying 22% the taxes you would if it has been assessed at fair market value.

Under those circumstances, it makes no sense to move to a bigger house when your family gets bigger, you just add on to the existing one, and if you sell to move to a smaller house when the children move out, your profit are wiped out by the tax hike.

There are a whole bunch of people sitting on houses that they would otherwise sell, because of the tax consequences.

So less housing reaches the market, you see less of the empty nesters moving into townhouses, etc., more sprawl, and through supply and demand, prices rise.

You also have the side effect that commerical property is corporate owned, and the corporation is sold, rather than the property, which raises the burden on new home purchasers.

It's one of the reasons that California is so screwed up.