With the end of the quarter and the end of the year, I want to give a final update to Alameda's Transfer Tax for 2009.
I wrote about the Transfer Tax back in March and in one of my first posts was about Measure P, so I just thought I should continue to update how much money the "Tax" is generating throughout the year. First the disclosure: all of the numbers reflect residential housing sales recorded on the MLS. Commercial building and private sales are not included so the numbers are higher than reported. The intent is to get a reflection of what is happening. Sales were up this past year, but the total dollars spent on homes was down, (See yesterday’s post) and if the council had not changed the transfer tax they would have seen more than a $50,000 decline in the transfer tax.
From January 1 to December 31, 2009, there were 492 sales that represent over $278,995,615 million dollars in transactions. Under the newly enacted $12 per $1,000 the transfer tax generated $3,347,947 in revenue. If the Council had not made the change ($5.40 per $1,000) the revenue would have been $1,506,576; a difference of $1,841,371.
The final quarter of the year made a huge difference in the amount of money generated for the city coffers. Over a million dollars was generated by the tax in the final three months. October alone generated over $500,000. Given all the factors putting pressure on the housing market foreclosure, a soft job market, tight lending and scared buyers/sellers the impact is has been harsh in the number of sales and the revenue generated.In the last blog post I said that in the short-term the tax may be one more factor for people not to buy, but given the stress on the City’s General Fund the tax may have been a necessary step. I think that this continues to be true.
I followed this topic for a year, instead of a quarterly update I will be changing to a semi-annual.
I want to give an update to Alameda's Transfer Tax for 2009.
I wrote about the Transfer Tax back in March and in one of my first posts was about Measure P, so I just thought I should continue to update how much money the "Tax" is generating throughout the year. First the disclosure: all of the numbers reflect residential housing sales recorded on the MLS. Commercial building and private sales are not included so the numbers are higher than reported. The intent is to get a reflection of what is happening.
Given all the factors putting pressure on the housing market foreclosure, a soft job market, tight lending and scared buyers/sellers the impact is has been harsh in the number of sales and the revenue generated. In 2008, MLS sales accounted for $446 Million in sales with $167 Million coming in the first seven months of the year. Compare Alameda sales in 2009 and you see that the first seven months have generated $127 Million: a 24 percent decline in taxable sales. Under the old tax rate 2009 would have been over $215,000 decline. From January 1 to July 30, 2009, there were 229 sales that represent over $127 million dollars in transactions. Under the newly enacted $12 per $1,000 the transfer tax generated $1,526,876 in revenue. If the Council had not made the change ($5.40 per $1,000) the revenue would have been $687,094; a difference of $839,781.
In the last blog post I said that In the short-term the tax may be one more factor for people not to buy, but given the stress on the City’s General Fund the tax may have been a necessary step.I think that this continues to be true.
I will continue to follow this topic at the end of each quarter to see how it is pacing.
The Fiscal Sustainability Committee presented their report to the Alameda City Council last night and at the core of their findings were two things: a weak housing market that produces revenue and an increase in employee costs (salaries, benefits and retirement) as the biggest expenditure.
The City receives funds from both property and the transfer tax. The bulk of the General Fund comes from property tax, but with homes not selling the revenue stream remains stagnate, because properties do not see big reassessment until they sell. Anyone following this blog knows sales have been slow in Alameda. (From the report)
Property taxes represent Alameda’s single largest source of revenue. While these economically sensitive revenues weaken, Alameda has not experienced the unprecedented real property tax declines experienced by many other communities. The primary reason is low sales of existing homes, which, while negatively impacting the Property Transfer Tax revenues, results in less reassessment of properties to lower values which would lower property tax collections.
To date there have been just a 129 sales on the Island. That is just under 26 sales per month.
The severe housing market downturn, and foreclosure meltdown was at the top of the list of issues that have impacted the city current state. The Committee also credited a tightening credit markets, falling consumer confidence and spending, rising unemployment and a decline in the stock market.
I know that the report is to give an overview but they dedicated less than a page to the “Housing Market Downturn” even though it was a top of the list. (This is the primary paragraph)
The housing market slowdown that started in 2005 has worsened and could continue well into 2010. In the Bay Area, the median price paid for a home in March 2009 was $295,000, down 46% from a year earlier, according to MDA DataQuick. In its most recent annual report, the Alameda County Assessor’s office noted that the countywide annual rate of growth in residential and commercial value declined in the past three years.
Yet Alameda has a low incidence of foreclosure and has actually experienced some growth in real property value, although less than projected. As the inventory of for-sale homes increases, downward pressure on both housing prices and construction occurs. This in turns leads to real and perceived drops in equity values that typically have a negative effect on consumer spending and sales tax revenues.
The Alameda median home price in January 2008 was $621,000 and in January of this year it was $457,000; a decline of 26-percent. This past month the median price has inched up to $544,000.
The property transfer tax remains static this year because of low sales volume. Even with the increase in the property transfer tax rate from $5.40 per $1000 to $12.00 per $1000; property transfer tax revenue is forecast to decline by 22% in the 2009 fiscal year.
The big risk is to the local economy and the housing sector is rising unemployment. Nationwide unemployment reached a multiyear high of 8.9% and California reached 11% in April 2009. The report accounts for part of the unemployment in the state are due to the housing crisis and the subsequent effect on supporting industries.
The thing to glean from the report is housing is the main economic driver and until homes begin to sell again the revenue for the City will not grow.
I was meaning to write about this topic last week, but all of sudden I lost track of the days and poof a week goes by. During last week’s City Council Meeting Michele Ellson from over at The Island sent me an email regarding the City Manager’s report on the transfer tax.The interim city manager Ann Marie Gallant reported the transfer tax is projected to bring in $2.6 Million this year. The big news it is less than the $4.1Million they estimated at the beginning of the year.
The City Manager stated that as bad as that is, it's also a good thing because the lack of Parcel Transfer Tax means we're not seeing as many homes go into foreclosure. And she also said we are not seeing the property tax amount declines many other cities are likely to face this year, which are in the order of 15, 18, and 19 percent.
It is not very surprising that the new estimate has been significantly reduced. January, February and March sales were very slow and April is not looking much better. The City Manager is correct that foreclosures have been slower in Alameda, but they need to plan for an additional wave if Alt-A loan resets and REO properties begin to flood the market.
Math has not always been my strongest subject, but the report of an increase in year-over-year increase is a bit fake-out. Yes it is an increase from the prior year, double the revenue, but if they projected $4.1 million and are now expecting 2.6M isn't that the real decline for the budget, not the year-over-year?
My favorite comment during the discussion cam from Council Member Lena Tam “An unexpected draconian decline in the real estate market in October of last year . . .” I love the use of the word draconian, but the decline started back in March of 2008 and October just happen to be the one of two up months during the period.
The Council Members did make a point to remind voters that if they not pass measure P the problem would have been twice as worst. Instead of doubling the Parcel Transfer Tax they would have seen decline of $800-$900,000.
I think that the revised $2.6 Million may be on the optimistic side given that sales have not seen a bump at all. To hit the new target Alameda would need to see nearly $217 Million in property sales. The Multiple Listing Service recorded $19.5 Million in sales for the first three months of 2009. The good news is that April is shaping up to be a good month with over $13 Million in sales with two days left in the month. For what I can assess from the sales pattern that puts the Island on track for total sales between $78 and $137 Million.
At $137 Million that would bring in a little more than $1.6 Million in revenue. Just a small warning about reading the numbers, the Multiple Listing Service is good to get a handle on this, but the MLS does not record all sales, especially commercial property. But frankly I do not see another $70 Million in sales unless the market makes a dramatic shift.
With the citizens of Alameda passing “Measure P,” an increase to the City of Alameda’s real property transfer tax from $5.40 to $12.00 per $1,000.00 of value, I wanted to look at it in real terms in whar it means when buying a home. I am going to stay away from the politics of the measure, which have been discussed on other blogs in detail, and look at the economics.
The tax is for the next 20 years and subject to audits, but what does it mean to the Real Estate market? The tax is charged when a property is sold and in Alameda it is common practice that the tax is split 50/50, between the Buyer and the Seller. Most new buyers are unware that the tax is even charged and can come as a big surprise when it is time to sign the final documents. The tax will have some real estate scrambling to explain the additional cost and some buyers looking for additional cash.
So for my purposes, what does the tax mean when you close a transaction as a buyer and open your wallet to shell out the cash that everyone in the transaction is looking to grab when you sign your closing papers?
If you are purchasing a $500,000 home, the transfer tax under Measure P increases from $2,700 to $6,000. So if you are the buyer of an Alameda home you would need to pay $3,000, sticking to tradition, at the close. This would be an additional $1,650 under the new tax. Adding this to closing costs that run between 1% and 3% of the purchase price.
For our example, I will use 2% (loan origination, appraisal, processing fees) or $10,000, that a buyer will need come up with for those fees. Combined the tax and closing cost together and the tab comes to a whopping $13,000 total. This is just to close the transaction.
Lending standard have now tightening, I will use a 10% down payment to continue the example, a first time buyer would need roughly $63,000 for the down payment and closing costs to get the keys.
The big question for me is in a competitive housing landscape where is Alameda positioned?
In AlamedaCounty, the City of Alameda will have the third highest transfer tax (see below). Only Berkeley, Oakland and Piedmont have higher transfer taxes while seven cities in the county and the unincorporated areas of Ashland, Castro Valley, Cherryland, San Lorenzo and Sunol do not charge the tax. I took a look at ContraCostaCounty and found that only the City of Richmond charges the tax. So of 33 cities in the two counties only 8 (24%) have a transfer tax.
City Real Property Conveyance Tax rates per thousand dollars of value are:
Berkeley$15.00
Oakland$15.00
Piedmont$13.00
Alameda$12.00 (as of election)
Albany$11.50
San Leandro$6.00
Hayward$4.50
In real terms this will not stop people from buying in Alameda. The tax will just makes it tougher to do so for those new buyers or those trying to move up to a more expensive home. I do think is some (very few) savvy buyers will make it part of their decision, but many will just be shocked when they have to come up with more cash at the close. For some it may just put the purchase of home out of reach for a while longer.
The tax will be a bigger impact if quality of life declines in Alameda and people look at the cost compared to other cities that have similar lifestyle qualities. The added fees then would be something that we be additional reason to look elsewhere. If the City Council uses the tax to improve quality of life then it becomes an investment and keeps the market vaule of homes up. That will be a tough task, with what the council is facing with next year's budget.
