Higher down payments could be compromise Prop. 13 reform

Housing wealth - cagle cartoonJan. 2, 2013

By Wayne Lusvardi

Could simply requiring higher down payments on home loans be a compromise reform of Proposition 13?

The Democratic Party supermajority in the state legislature is presently pushing for reforms of Proposition 13, the 1978 initiative that limits property tax increases to 2 percent per year until a property resells.

Some of the legislature’s proposed reforms include  eliminating Prop. 13 for commercial properties and lowering the voter threshold for school parcel taxes to 55 percent from the current two-thirds.

But there may be a better way.

The culprit involved in state budget deficits is not Prop. 13.  It is low down-payment requirements and interest rates on home purchases combined with the effects of slow-growth management and environmental laws. Growth-management laws cause the excessive housing booms and busts that throw state and school budgets out of balance, as well as causing upside-down home values.

Bogeymen don’t cause the problem

During recessions, a collective rain dance ritual to bring taxes from heaven occurs in California.  Part of this ritual is for local school districts to protest projected budget cuts that end up never actually laying off teachers.  Teachers are guaranteed 43 percent of the state general fund budget under Proposition 98. Politicians know voters will vote for school children before they will vote for health and welfare programs. Any tax increases are money laundered to health and welfare programs.

It is sales and income tax revenue flows that are most prone to sudden declines in California.  Nonetheless, Prop. 13 is typically blamed for California’s budget deficits.  But Prop. 13 has a built-in circuit breaker that prevents large increases or decreases in property taxes in any one year.

Democratic politicians also claim commercial properties are under-taxed due to Prop. 13 tax loopholes.  But it has recently come to public awareness that reforming Prop. 13 is not needed to close the alleged loophole in majority ownership transfers of commercial properties. Large commercial property owners are just used as bogeymen for eventually getting rid of Prop. 13 altogether on both commercial and residential properties.  Ending Prop. 13 for commercial properties mainly would affect struggling small businesses that comprise 97 percent of all businesses in the state.

Prop.  13 is a policy that lessens the shock of higher property taxes during economic housing booms and lower taxes during housing busts.  This prevents the proverbial widow from being thrown on the street for an inability to pay greatly increased property taxes during booms. And it prevents huge declines in property tax revenues for public schools in any one year.

Conversely, there is a manufactured erroneous media perception that tax revenue shortages during economic recessions are the result of Prop. 13 constraints against large property tax hikes during housing booms.  Prop. 13 critics ignore the capital gains tax revenue from the dot-com, Facebook and other bubbles.  But capital gain tax revenue is highly unpredictable for budgeting.

There is also the problem of upside-down home values as a result of crashes following housing price booms.  Politicians may be averse to raising property taxes on homes where mortgages exceed home values by as much as 20 to 50 percent.

Low Down Payments with Slow-Growth Plans are Main Cause

It is the toxic combination of slow-growth and smart-growth plans and environmental impact reports with low down payment mortgages that help bring about abnormal booms and busts in California’s real estate market.

Homeowners don’t want to be subjected to wild increases in property taxes that displace widows and moderate-income homeowners. Thus, there is Prop. 13 to protect them.

But state government and local school districts only want budget surpluses from housing booms and not deficits from the busts. The problem is that government doesn’t want to see that it is complicit in creating the deficit problem. Instead, they always want to blame Republicans.  But there are no more Republicans to blame because their power has become so small. And Republicans aren’t to blame in the first place.

Democratic Party central planners want to reserve central cities and Lake Tahoe for the wealthy or politically connected lower class by “performance zoning” and design commissions. In California, it is “Petaluma style” growth management.  Growth management drives the politically unconnected out to the urban fringe, “edge cities,” and transitional farmland for new housing subdivisions.  Housing planners call this the “Push Down-Pop Up” phenomenon.  Thus, growth management results in stable or rising property values in San Francisco but boom and bust cycles in Fresno, Stockton and the Inland Empire.

Slow-growth plans and environmental clearances create inflated home prices by restricting the supply of available land.  Low interest rates and low down payments add fuel to this fire and cause home prices to rise beyond what incomes can support.  This creates a vicious cycle where homeowners need continual booms to offset their over-mortgaged housing that incomes cannot support.

California homeowners become addicted to voting for policies that promote housing booms to be able to sell their homes for an appreciated value.  And booms push property tax revenues under Prop.  13 up faster than money inflation.  Prop.  13 reformers never protest the windfalls from the hyper-inflation of housing.

As shown in the table below, the average home loan down payment in California is 13.25 percent.  This comes nowhere near the 43.76 percent real home price decline reported by the Federal Housing Finance Agency from 2006 to 2009.  

Real Home Price Downturns and Down Payment Percentages

Area Median Percent Real Decline2006 to 2009 Recovery Duration1975-2009 Average Down Payment in2009
United States -30.5% 20.75 years 12.29%
California -43.76% 6 years 13.25%
Source: A Brief Examination of Previous House Price Declines, Federal Housing Finance Agency, 2009.“Down Payment on a California Home Averages 13.25%,” O.C. Register, 12/14/2011

San Francisco has few “no down payment” loans; Fresno and the Inland Empire have a lot.  Home values outside coastal growth management cities and counties are lower the further out you go:  “drive till you qualify.”  Low interest rates and low down payments help home buyers in coastal areas afford bigger houses. The rich get richer and the poor get upside-down mortgages.  And state and local governments and school districts get budget deficits during recessions.


Housing bubbles are manufactured in California, not on Wall Street. One in every 173 homes in California was in foreclosure in 2009; only 1 in 1,000 in Texas.

A sociological law is that beliefs tend to hang together. It is likely the same Democratic politicians and voters that embrace growth management, environmental clearances and affordable housing policies also support reforming Prop.  13. But there is no awareness that such policies create the “roller coaster” housing economy that ends up making tax revenues so changeable and result in government budget deficits.

If Democrats in full power in California were serious about reforming Prop. 13, they would leave it alone — except for requiring much larger housing down payments in the entire state. Doing so would push inland property values in the direction of the stability already enjoyed by coastal properties.



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  1. Rex the Wonder Dog!
    Rex the Wonder Dog! 2 January, 2013, 17:30

    Funny, I just made a comment on another site about this yesterday, that the no skin in the loan game is one big reason we crashed, and Fannie Mae and Freddie Mac are both doing 3% down loans, which is 17% too low.

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  2. Wayne Lusvardi
    Wayne Lusvardi 2 January, 2013, 19:12

    In retrospect the title of the article should have been “Leave 13 Alone: Raise Downpayments Instead.”

    The point of the article is no compromise as far as Proposition 13 is concerned. The reforms proposed by the state legislature will do nothing but tax the symptoms and not the causes of protracted budget deficits and upside down mortgages. Growth management laws in combination with the package of housing affordability incentives (very low interest rates, mortgage deduction from income tax, local homestead exemptions, deferred second trust deed loans to finance down payments, or even putting down payments on credit cards) is a toxic brew that throws state and school school district budgets out of whack.

    Imagine the electrical system in your house is hit by a large power surge which blasts out even the circuit breakers. Don’t blame the circuit breaker. Proposition 13 is a circuit breaker. Blame the power company that didn’t install a transformer able to handle the surge. A large down payment is analogous to a surge suppressor.

    The enemies of Proposition 13 are also the enemies of stable tax revenues for state and local governments and school districts. They are also the enemies of full disclosure about the risks to homebuyers of low down-payment loans turning upside down. It is time for Democrats to give up their fake moral superiority about affordable housing and lack of tax revenues for public schools during recessions. Democrats are fully in power and government budget deficits are of their own making. The enemies of the enemies of Proposition 13 are your friends.

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  3. SkippingDog
    SkippingDog 2 January, 2013, 21:53

    California had stable tax revenues for state and local governments before Prop 13 passed under the guise of protecting granny’s house. The only reason granny’s house was in any danger at all was because her house skyrocketed in value during the late 60’s and 70’s, making her much wealthier on paper than she had been. When her home was assessed at its much higher market value, granny screamed that she couldn’t pay the additional taxes. That was never really true, since she could have tapped the much expanded equity she held in her property to pay her still reasonable property taxes – those supporting stable revenues upon which the true Golden Years of our Golden State were built.

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  4. Richard
    Richard 3 January, 2013, 08:45

    SkippingDog: Given that granny is on a fixed income that matched her expenses, how is she to pay the new loan she took out on her previously “free-and-clear” home to pay property taxes? Wait, I know… she’ll borrow more. And that will send up the mortgage payments. As will next year’s tax increases. And since this is obviously an equity line, not a fixed-value mortgage, and equity lines are variable rate instruments, when the high inflation of the late 70’s hit, the mortgage payments skyrocket… but no worries… just tap the equity line some more. And when the bubble burst in ’89, and the bank pulls the line of credit or granny hits the line’s limit, THEN what you propose will become self-evident. It was never granny’s house in the first place… the government was just letting her live there as long as she paid for the privilege.

    The stability you claim existed when Prop 13 passed wasn’t stability for granny. It wasn’t even stable revenues for government. It was the “stability” of constantly *rising* tax revenues for Sacramento and county governments. These came at the expense of homeowners who actually were being taxed out of their homes. Now, there is an economic argument that letting granny stay in her home isn’t the highest and best use of the property from the point of view of the community at large (which gets back to the question of who really owns the property.) It’s even arguable that Prop 13 added to the bubbles in CA real estate. But don’t try to deny the very real effects of having granny (and everyone else) taxed out of her home before Prop 13 passed.

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  5. Ed
    Ed 23 January, 2013, 19:22

    If I recall history, in the late 75’s, Governor Jerry Brown and the democrats were spending and raising taxes like crazy. They cut funds to the counties, to balance the State Budget. The counties were forced to raise taxes every year to balance their budgets. The Taxpayers and Homeowners revolted in 1978, after property taxes doubled in a year. This also affected renters, as the increase in the property taxes were passed on to renters. The passage of Prop 13 included a 2/3 requirement majority vote to raise or pass new taxes. These two issues forced our elected officials to stop spending, stop raising taxes and balance the budget. Then along came Prop 98, which required 40% of the state budget for Education, leaving only 60% for balancing the State Budget. Year after year higher state taxes began to force businesses to leave the state, along with a failing state economy. Now the Democrats have a 2/3 majority and the ability to remove Prop 13 and increase taxes as they see fit and to keep spending… Bottom line; All they will do is hurt the economy and push more businesses and wealthy taxpayers to leave the state. It is a time proven fact… The Fed is now following in California’s footsteps. Our elected officials know that if they cut spending they will lose their elected seats. Bottom line; both have a spending problem that they do not desire to address. PS: The Republicans are almost as bad…

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