Superstorm Sandy was a killer. Sandy was also a vandal and an arsonist. But as far as government in New Jersey goes, most importantly she was a thief. Sandy stole that thing that is valued beyond silver and gold. She stole waterfront property.
In a system that uses real estate values to raise tax money for schools and local governments, nothing is more important to that universal asset of real estate than location. And no location is more precious, more pricey or more taxable than waterfront. Stick a bungalow on a piece of sand with views of the Atlantic and it becomes more tax-assessable than any McMansion on a hillside lot. You may have your commercial highway frontage, your key downtown locale and your mountaintop tree-lined view – but nothing assesses better than waterfront. Be it lake or pond, stream or river, bay or beachfront, usable moisture on one side of a property makes for high taxable value, a tax collector’s bonanza and the property tax Sugar Daddy for every resort and rural community in the state.
All of that was true before Sandy, well, before Sandy and Irene, oh and Ivan if you’re thinking about west Jersey. Of course, there was Floyd too but these storms only come along every now and then – except that now the nows and thens have been getting closer together. On top of which those are only the named tropical variety of storms. Don’t forget the anonymous nor’easters, training thunderstorms, ice storms and the occasional debilitating blizzard.
These, however, are not the worst of storms. The financial storm of 2007-2008 brought universal havoc to property values throughout New Jersey. Losses in property tax appeals for the three tax years 2008 to 2010 reduced taxable values state wide in excess of $7 billion. This loss in value was strictly a product of market forces in the aftermath of the financial crisis. Continued market softness, further tax appeals and almost universal reassessments of taxable properties in 2011 and 2012 will lower the state’s “value” even more. (Reassessments are not revaluations. Revaluations occur every ten years or so as each property in a municipality is valued anew based on its worth in the face of new market conditions. Reassessments forestall tax appeals by lowering all properties in a municipality by a fixed percentage by class to better reflect a changed marketplace.) Research shows that majority of tax savings went to commercial and industrial taxpayers who file in Tax Court rather than appeal to the less generous County Tax Boards. This pushes the ever-growing tax burden away from so-called ratables and onto single-family residential homes, which bear an increasingly large share of the local tax load.
While it is true that the top end of the residential market has recovered to near pre-bubble levels, the rest of our residential stock – along with commercial, industrial and even raw land stocks – remain far below 2007 levels. Much of this property in all categories is “underwater” – worth less than the amount borrowed to purchase it. A number of agricultural, brownfield, idle and raw land properties being held for speculative purposes are now also “underwater,” in the sense that due to present and likely future market conditions, they cannot be developed profitably. Many of the properties in this category are mortgaged, or have been used as collateral, at values far above their present real worth.
This, of course, does not include the enormous interest due on long term mortgages at pre-TARP interest rates. A person purchasing a home or business property in 2006 for $500,000 with a long-term mortgage will find the present value nearer to $333,000 today. That person may well face total interest and principle debt given pre-TARP interest rates well in excess of $3 million. The few plans to ease these burdens have failed. As such these properties remain a major negative factor in the marketplace.
In the wake of the climatological and financial storms the very nature of property as a financial asset has been called into question. Tax assessors still consider waterfront property prime, but insurers and investors and those applying for tax relief are beginning to characterize waterfront property as an over-valued liability. Given new flood maps, new wastewater and runoff regulations, building restrictions and new more expensive building requirements, they may well have a point. Industrial and commercial properties also face devaluation due to overseas manufacturing competition, while commercial and retail properties face challenges from decentralization. Brick and mortar retail establishments such as Barnes and Noble have already been severely challenged by internet shopping. Increasingly, office space is viewed as a wasteful expenditure given work at home options and the outsourcing of traditional office tasks to overseas location like India and the Dakotas (author’s note: I realize the Dakotas are not overseas). Manufacturing properties obviously have fallen in worth and taxable value given the advantages of overseas producers and the efficiencies of robotic technology.
If taken from a market perspective, as all our property values are, the verdict is in: Outside of the high-end residential category, real estate is no longer a reliable investment. The rock solid surety of American real estate is a thing of the past. The financial markets have changed radically, limiting the ability of most families to even consider purchasing property. Energy markets have changed radically, the new normal of $3.50 to $4.00 a gallon gasoline and the impractical nature of long distance mass transit have redefined the values of properties not near urban work areas. Job markets have changed radically, lower wages are preferred by employers to higher skill sets; inexperienced workers without benefits are preferred to seasoned professionals with health and retirement requirements; the less expensive, less educated are preferred to the highly educated and highly paid. Recently at the Mecca of “survival of the fittest,” Wall Street, layoffs saw experienced wealthy high-end producers replaced by rookie traders.
The concept of ever-expanding income as workers age and become more experience and therefore more valuable is as dead as the dodo. With it has perished the little starter home with the white picket fence, the very seed corn of a real estate based economy. Only the belief in ever-expanding income and equity investment makes mortgage-based home ownership feasible. That illusion cannot stand in the face of consumer inflation and “less is more” hiring practices. If the internet has killed the concept of “location, location, location”; if robots have killed the skilled worker and satellite communications are eliminating office jobs; if energy pricing is causing the suburbs to recede into the cities: if real estate is dying, how can New Jersey continue to rely on real estate for property taxes in excess of $25 billion per year to fund schools, roads, police, fire, EMTs and the like? The answer is it cannot.
So what now, then?
The implications of this basic change to our economic reality come in two forms. First, the new nature of property calls for a new way to fund local and regional (i.e., county) government. Unless the vast majority of the local tax burden is to be placed on an ever-weakening residential real estate sector then new ways to fund schools and local services must be found. Secondly, planning for the state, the regions and localities has to be done in the new light of economic real estate reality. Presently, there are a number of large expensive battles being fought concerning developments based on the obsolete real estate model. The battles waste money, time and effort promoting or opposing projects that will never come into being. We cannot successfully plan and finance a future that is built on the fancied visions of a bygone era.
George Stafford of Wharton has a long history of government service, serving from 1976 to 1987 as a councilman in Wharton. He also served four years as a Tax Commissioner in Morris County, three years a State Senate Aide, three years as director of Cable Television for the Parsippany-Troy Hills School Board and three years with the New Jersey Motor Vehicle Commission. Stafford ran his own advertising, public relations and consulting firm and is now Outreach Director for the New Jersey Highlands Coalition. He is published in a regular column in the Recorder family of newspapers and has been a contributor to various newspapers in New Jersey including the Star-Ledger and the Daily Record.
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