From a small northwestern observatory…

Finance and economics generally focused on real estate

Archive for the ‘Uncategorized’ Category

Tax burdens and real estate

leave a comment »

I’m not paid to be an apologist for California.  I’ve enjoyed visiting there many times, have had a few profitable projects there, and I can speak very highly for their wine (although Washington will give them a run for their money).  That said, I’ve heard California slammed recently for its supposedly onerous tax burden, and the impact that supposedly has on property values.  Somehow, this doesn’t resonate — yes, California has a somewhat higher tax burden than other states, but by how much?  And how does that impact their overall economy and property values?

I’ve gathered a bit of data, and I’ll be honing this into a more formal study in the coming weeks, but I thought I’d give you a bit of a peek into what I’m finding.  First, California does not have the worst tax burden in America.  According to information I’ve gathered from the Tax Foundation, the overall average tax burden in California from 1977-2012 was 10.95%.  It actually declined significantly over that period.  To put this in comparison, the highest average tax burden among the states during that period was New York (12.53%) and the lowest was Alaska (6.61%).

The question of course is, do these local taxes have an impact on property values and the economy in general?  I’m still crunching the numbers, but it appears that there is little if any linkage.  For example, as noted, California’s tax burden has actually dropped over the 35-year period in this study, but incomes have increased by 43.5%, and property values increased by 192.67% from 1991 to 3rd quarter 2019 (yes, this takes into account the up and down of the recession).  In New York, where the highest local taxes were recorded, incomes increased 78.31% over the 35-year study period and property values have increased 154.19% since 1991.

In the lowest tax state (Alaska), incomes increased 1.56% over a 35-year period (yes, you read that right) but indeed property values increased 167.7% from 1991 to the present.  Among the 50 states plus DC, the average property value increase from 1991 to the present was 262.59%, while the average tax burden was 9.75%.  Ironically, this means that California, at 10.95%, was only 1.2 percentage points higher than the national average for local tax burden.  The average per-capita income, averaged by states, grew by 31.19% over the 35-year study period.  Thus, both New York and California had measurably above average increases in per-capital incomes, despite having somewhat higher local tax burdens.  However, property values in those states, while they increased, increased at a somewhat slower rate than over states.

By the way, my adopted home state, Washington, had above-average property value increases over time (286.24%), above average income increases (59.84%) and a slightly below average local tax burden (9.41%).

There is w-a-a-y more to be done on this.  I’ll keep you posted as I know more.

Local tax burdens are a function of state income tax rates, local property taxes, sales taxes, and other state revenues paid by individuals.  Property values are based on the Federal Housing Finance Authority All-Property Index.  Per capita income comes from the Census Bureau.  Tax and income data is lagged to 2012 in order to forecast later year home values.  Averages are based on 5-year increments over a 35-year period from 1997 to 2012.

Written by johnkilpatrick

December 7, 2019 at 5:14 pm

Posted in Uncategorized

Real Estate as a Tax Hedge

leave a comment »

There is a fair amount of speculation about the future of the U.S. tax code.  I don’t want to get into politics here, but if and as the tax rates change going forward, many serious investors will look backwards and say, “Gosh, I wish I’d done _____ when I had a chance.”

Well selected and well managed real estate has, for generations, been recognized as a hedge against taxes, inflation, recessions, market instability, and all manner of economic fluctuations.  Looking at the economic history of the past 100 years or so, we can only point to one real estate-related bubble, and in reality that was, at the core, a finance problem and not a real estate problem.  Even before, during, and after the most recent recession, well-selected and properly priced real estate performed well.

A few tips and notes, and as usual please bear in mind this is neither tax, legal, accounting, nor investment advice —

  • Current income from real estate can be sheltered by depreciation.  Indeed, for most income-producing properties, the current income will be nearly tax free, both for state and Federal taxation.
  • Unlike municipal bonds, the income is usually tax sheltered regardless of which state the property is located.  For example, in New York, a muni bond is state-tax exempt only if it is a New York bond.  However, the real estate can be located anywhere and benefit from depreciation sheltering.
  • For family-run businesses, real estate can be an excellent way to bifurcate the returns on the business between participating family members and non-participating ones.  The property can be separately held in a trust, with rents paid from the business and enjoyed — with tax sheltering — by all family members.  This also helps insulate the family wealth from any potential business problems that may arise.
  • Intergenerational transfers of real estate can be accomplished in a simplified, and often tax-advantaged manner.
  • Personal residences are usually sheltered in part from bankruptcy, and in some states (Florida, for example) the entire residence may be used as a bankruptcy shelter.

There is more, of course.  As a reminder, I have a book coming out in January from McGraw Hill — Real Estate Valuation and Strategy.  I’ll expand on these and many other real estate investment topics between now and then.

3D Kilpatrick (002)

Written by johnkilpatrick

November 14, 2019 at 8:24 am

Posted in Uncategorized

A brief primer on interest rates

leave a comment »

Someone asked me, “Should I wait to buy a house since interest rates are headed to zero?”.  Huh… well, dude, I got bad news for you – – interest rates whipped past zero a while ago.  Denmark just this week issued some bonds with negative yields.  I’m not saying this is as low as it gets, but it might be helpful to understand a bit more about how interest rate changes affect the consumer.

First, note what I’ll call “wholesale” rates and “retail” rates.  I bought a dozen eggs this week at the grocery.  Locally sourced, cage free, no anti-biotic eggs, from chickens that ate a nice diet of bugs and stuff — the sort of stuff chickens like to eat.  I paid $3.99 (plus tax).  I’m sure we can both agree that the farmer didn’t get all of that $3.99.  Some of it went to the grocer.  Some of it went to the truck driver.  Some of it went to the wholesaler.  The farmer was probably lucky to get $2 (but that’s another story).

Mortgage loans are like that.  Most mortgages get bundled into mortgage backed securities and sold through a somewhat complex pipeline to investors (Fannie Mae, Freddie Mac, certain trusts and pension plans, etc.).  These trusts cannot purposely buy paper at negative yields.  The managers have a fiduciary duty to their clients not to do that.  Hence, there is a floor below which wholesale mortgage rates cannot fall, and that floor is not a negative number.

Now, above that floor, everyone has to get a piece of the action, just like the people in the pipeline who sold me eggs.  Let’s face it, they have bills to pay, and want to take home a paycheck on Friday, just like the grocer and the truck driver.  Finally, there is a fee for servicing the loan, which has to be added to the top before you hear about the retail rate.  W-a-a-a-a-y back when I started in this game, that fee was statutorily set at 55 basis points, or 0.55%.  Thus, if you had paid 10.55% for your mortgage (not a bad rate back then), the point-five-five part went to the people who collected the monthly payments, kept the books, made sure you paid your taxes and insurance, and handled the foreclosure if it came to that.  The remainder — the 10% part — went down the pipeline to all the investors.  The laws were changed a number of years ago, and the servicing rights have become competitive (in other words, the fees have dropped).  However, it’s still a real, positive number.

Probably the more interesting question is what happens to mortgage rates before, during, and after a recession.  Since everyone seems to think one is coming, how should we be prepared?  Here is a chart of mortgage rates (high, low, and average) versus the years in which we had a recession.

Recessions and mortgage rates

We’ve actually had 7 recessions since 1970, but a couple of them ran into one another, so this chart only shows five recessionary periods.  No matter, for our purposes.  Note that in the first two, we were going thru a period known as “stag-flation” where the impacts of the recession were exacerbated by high inflation.  Since the 1980’s, inflation has more-or-less been throttled, so those recessions are more useful as predictors.  From 1989 until 1992, average mortgage rates dropped about 2 percentage points (from 10.32% to 8.39%).  From 2000 to 2002, spanning the shortest of these recessions, rates fell about a half of a percentage point (from 7.44% to 6.97%).  Before-and-after the recent housing melt-down and recession, rates fell from 6.41% in 2006 to 4.69% in 2010 — a difference of slightly over two percentage points.

The average 30-year, fixed-rate mortgage in 2018 was 4.54%.  Today, most lenders are quoting a rate of 3.75% on that same mortgage.  Could rates drop two percentage points (to 1.75%) in an incipit recession?  History suggests that is entirely a factor of the length of the recession.  A brief dip, such as happened in 2001, might have little impact on mortgage rates.  A longer recession would probably have a more dramatic impact.  Notably, of course, there is an absolute floor, and it’s not at zero percent.

Written by johnkilpatrick

November 2, 2019 at 10:41 am

Posted in Uncategorized

Great news!

leave a comment »

I am particularly pleased to announce (brag?) that the Washington State Economic Development Finance Authority (WEDFA) will be honored with the Excellence in Development Finance Award by the Council of Development Finance Agencies at the upcoming National Development Finance Summit.

I’ve had the very real pleasure of serving as a Director of WEDFA for several years now, at the behest of Governor Jay Inslee.  WEDFA is an independent agency within the executive branch of state government, created by the state legislature to act as a financial conduit to businesses through the issuance of nonrecourse revenue bonds.

WEDFA was honored for the Columbia Pulp project, a wheat straw-to-paper pulp facility in Columbia County, Washington. Farms in this area (known as the Palouse region) generate post-harvest wheat straw in quantities too large to effectively till back into the soil. This represents a very real waste issue for the region. A significant portion of that wheat straw will go into an environmentally friendly pulping operation developed and commercialized by Columbia Pulp I. Paper pulp will be sold on the open pulp markets. One major use of the project’s output is expected to be compostable food containers and straws. Although not yet in full commercial operation, the project has brought about 100 new long-term industrial jobs to a county of 2,000 people. Project construction activity also added a powerful two-year economic stimulus to the area.

The Columbia Pulp I project was made possible by a coordinated efforts of institutions and individuals, including wheat farmers, scientists, mill specialists, institutional debt investors, equity investors, local economic development groups, tax credit providers and state and local government. The Washington Economic Development Finance Authority was able to facilitate the project’s debt financing through the issuance of $198,755,000 of Environmental Facilities Revenue Bonds. The bonds were issued in three limited sales to institutional investors, the final piece of which was issued in 2019.

“This year’s recipients are model examples of what is currently taking place in the development finance industry. We are proud and excited to honor this year’s recipients at the 2019 National Summit in Tampa, Florida” said Toby Rittner, President & CEO of the Council of Development Finance Agencies.

Written by johnkilpatrick

November 1, 2019 at 3:07 am

Posted in Uncategorized

Baby Boomers and Housing

leave a comment »

In an on-line forum, I was asked recently, “In the USA, how will the aging of the “baby boom” generation affect the future of the housing market.”  My answer was as follows:

Well, there’s an old joke in economics — “How did the French revolution affect world trade?” Answer: It’s too early to tell.

Without question, the baby boomers spent a LOT of money on bigger houses, more vacation homes, and lots of other conspicuous consumption toys (boats, airplanes, etc.). It is becoming clear that the subsequent generations do not have the same taste in housing. This is going to mean some radical shifts in the nature of home ownership. Conversely, the boomers are living a lot longer than prior generations, and living independently longer. This means that the aggregate demand for housing is a function both of the size and the shape of the demographic “baby boom” bubble.

Consider that the boomers in the USA are often referred to as the “pig in a python” generation. The birth rate in the USA took off like a rocket about 9 months and 15 minutes after the end of world war II. (Think about it). The birth rate collapsed, more or less, about 9 months and 15 minutes after the introduction of the birth control pill (not exactly, but the analogy is useful). As such, this pig-in-a-python demographic is moving thru the economy, and refuses to get old and die. (I write this as someone born at the absolute crest of that wave.)

US Birth Rate 1909-2008

Note:  Baby Boom Generation shown in red.

The future implications for housing, housing demand, and the mix of housing demanded by the market, will be dramatic. However, we don’t yet know all the details and shape of that demand, and may not know for some years to come.

Written by johnkilpatrick

October 27, 2019 at 8:29 am

Posted in Uncategorized

Real estate risk audit

leave a comment »

Sixty percent or more of American households own some kind of real estate, even limited to the home they live in.  Perhaps even more Americans may indirectly own real estate thru a pension plan or 401-K.  Wealthy families nearly always have significant real estate holdings, both for the portfolio diversification aspects and as a hedge against economic bad-times.

The recession of 2007-09 left a lot of investors gun-shy.  Historically in the U.S., real estate has been a solid investment in both good-times and bad, and since WW-2, single family homes have increased in value about 2% above inflation, year-in and year-out.  However, before, during, and after the recent recession, real estate prices roiled in much of the country, although admittedly prices seem to be back on an even keel.  Nonetheless, investors continue to be nervous, and rightfully so.

House Price Index versus Recessions

Of course, for investors, developers, and managers with more complex portfolios, these questions require a bit more of a portfolio audit.  For the securities investment portfolio, significant resources are available to manage and evaluate investment choices in the face of changing circumstances.  For real estate investors, tools are somewhat more granular and heuristic.  Nonetheless, the stakes are high, and a solid real estate portfolio audit is a must-do on a periodic basis.

What should an investor expect out of such an audit?  For a securities portfolio, the answer is simple — some stocks get sold, others bought, and some resources get shifted to other asset classes.  For real estate, the key may be simply be one of management or financial emphasis.  If a recession is coming, and vacancy rates rise, then operational and financial leverages change.  These may necessitate financing shifts or evaluation of current and prospective leases.  Development plans may need to be put on hold, or conversely perhaps accelerated.   Some properties may need to be re-aligned or even positioned for redevelopment after the trough of the recession.  Shrewd investors keep a lot of dry powder going into a recession, as buying opportunities will abound.

If you have questions, drop me a line.  I look forward to the opportunity to chat with you about these things.



Written by johnkilpatrick

October 23, 2019 at 9:17 am

Posted in Uncategorized

Rock Hall 2020 Nominees

leave a comment »

So, the Rock Hall of Fame has announced the nominees for the Class of 2020.  Other than the continued oversight of Steppenwolf, I think it’s a great list.  (You might refer to some of my meandering about the Rock Hall on the sidebar, to the right of the screen.)

Pat Benatar, Dave Matthews Band, Depeche Mode, the Doobies, Whitney Houston, Judas Priest, Kraftwerk, Motorhead, Nine-Inch-Nails, The Notorious B.I.G., Rufus featuring Chaka Khan, Todd Rundgren, Soundgarden, T.Rex, and Thin Lizzie make up this year’s nominees.  Regular readers of this blog will probably guess my preferences.  The oversight of Whitney Houston and the Doobie Brothers over the years is nearly unforgivable.  Ms. Houston is the ONLY artist to chart seven consecutive No. 1 Billboard Hot 100 hits, and “I Will Always Love You” is the best-selling single by a female artist in music history. The soundtrack to The Bodyguard is the 4th best-selling album of all time (behind Michael Jackson, AC/DC, and Pink Floyd, all of whom are in the Hall). Add to it — and this is amazing — her soundtrack to The Preacher’s Wife is also the best-selling GOSPEL album of all time.

The Doobies are my personal favorite act of all times. Their induction ought to be a given — they are on nearly everyone’s “WTF” omission list. One of the biggest problems the Hall will have is picking exactly WHICH members of the Doobies get to receive the award — there have been nearly 100 Doobies over the years. This was a problem with Chicago — the original 7 from the first few albums got inducted, but none of the band-members who joined after Terry Kath died and Peter Cetera left. (By the way — wasn’t Cetera a jerk for not showing up????). Anyway, it would be hard to argue that founders Tom Johnson, Patrick Simmons, Dave Shogren, and John Hartman don’t belong on the stage, plus Michael Hossack, Skunk Baxter, Tiran Porter, Keith Knudsen, John McFee, and of course Michael McDonald. That group, plus a few others, would pretty much cover everyone up thru their 1982 disbanding, and all of that crowd should be on the stage sometime soon.

Of the rest, of course Judas Priest, Notorious B.I.G., and Todd Rundgren will be Rock Hall inside favorites.  However, my votes (and so far, the largest number of fan votes) would go to Pat Benatar.

Fans can vote for up to 5 nominees each day.  The top 5 vote getters will be counted along with the normal judging, in a secretive fashion known only to the top members of the Illuminati and, apparently, the Pope.  Simply visit to make your voice  counted, however, they manage to count these things!

Written by johnkilpatrick

October 19, 2019 at 10:44 am

Posted in Uncategorized

%d bloggers like this: