Real Estate Round-Up: The cost of Stay-at-Home

San Diego’s jobless rate is currently at 25% according to the San Diego Association of Governments. That number is expected to grow until the “stay at home” mandate is lifted, and people are able to return to work.

To put some perspective on this number, consider that in 2008 because of the Great Recession, the jobless rate was 11.1%, and we thought that was disastrous.

Do you recall the fallout in real estate because of an 11.1% jobless rate? I do. Thousands of people lost their homes, and businesses shuttered. The loss was unimaginable, and the recovery was slow. People’s lives were forever changed.

So here we are again. We are at a crossroads, where the economy must be measured against the risk to health.

The state faces a budget shortfall, due to the loss of revenue from shuttered businesses, additional costs associated with unemployment and the expenses to provide resources to implement the state mandates regarding COVID-19 that could top $54.3 billion according to the state’s legislative analyst’s office.

That figure is expected to grow to $85 billion in the next few years. A year ago, the state had $21 billion surplus. The $54.3 billion deficit does not include the state and local government liabilities of $1.5 trillion, that are reported outside of the budget.

This number represents outstanding bonds, loans and other long-term liabilities, along with the officially reported unfunded liability for other post-employment benefits, which is primarily retiree health care, as well as unfunded pension liabilities. That’s a separate story.

So, what is the fix for the immediate shortfall to the budget? Every article I’ve read focuses on the multiple cuts that will need to be made in programs throughout the state, which impacts counties and cities. The biggest concern is how the revenue shortfall will impact the state’s constitutionally required funding level for public schools and community colleges. That budget item alone will reflect a deficit of $18.3 billion. There will also be cuts across the board to many other social programs.

Cuts aren’t the only way to fix a shortfall. The other way is to increase revenue. To date the potential for revenue increase is not being written about but was being discussed before COVID-19. Accessing this revenue will impact all property owners.

Every property owner should be afraid, very, very afraid. California is going to have to raise revenue quickly and if income tax is down and sales tax is down, where else can the government look but at something that is stable and established – real estate.

Currently, property values remain stable. If foreclosures ensue, then gradually property values will come down and assessed values could be reestablished at the reduced market price. That will take some time to unravel. For now, property taxes are a published number with a set income for the county. This fund is ripe for the picking.

The California Schools and Local Community Funding Act is the first step and has already qualified for the November ballot. Make no mistake, it is an attack on Proposition 13 protections. The initiative would reassess commercial property every three years, whether or not there was a transfer of ownership.

Currently commercial property is treated just like residential property as it pertains to property tax basis. Once the basis is established, the taxable base can increase no more than 2% each year, unless there is a reassessment due to a major remodel or in the case of a change of ownership through the sale of the property. The Legislature expects to garner an additional $11 billion to the state budget if the initiative passes.

If commercial property assessment changes because this initiative passes, rents will increase and the cost of whatever is being produced will increase to cover the increased rent. It’s the first step on a slippery slope that leads directly to a residential property tax increase.

Here’s the thing, 54% of the residents in California are renters. The “holy grail,” Proposition 13, does not matter to them. With housing prices out of the reach for most residents, the belief that they too might be able to become a homeowner is not factored in. With this short-term thinking, renters do not perceive any costs to them if Proposition 13 is stripped away. They might even see it as a benefit to them.

More money to the county means more money for programs that assist those in highest need. The county has budgeted to collect $6.9 billion in property tax for the tax year 2019-2020. Imagine what that number would be if the tax assessor was able to reassess the value every three years like the proposal for commercial property. As the percent of voters who are renters increases, the protection for homeowners decreases.

Another area that is ripe for the taking is in the creation of a service tax on all service providers. Think accountants, hairdressers, gardeners and dry cleaners. Think it can’t happen? Think again.

Once all grocery items were nontaxable. Now only specific items of food are exempt from tax. Don’t believe me? Next time you do your grocery shopping look at your bill. There is generally a sales tax line. It is not 7.75% of the total purchase, it is 7.75% of the items that are no longer considered exempt. Inch by inch, bit by bit.

Another golden egg is an asset tax. Asset taxes are taxes upon the value of assets. Property tax is one form of asset. But many people have additional assets like car collectors, art collectors, vineyards, etc. This tax would not be a one size fits all equation but is another opportunity for tax revenue.

With a proposed budget deficit that is a result of the shutdown of California’s economy March 19, the price to everyone will be substantial and inclusive. Only the wealthiest or the poorest of California’s residents will not feel the impact. Middle class will be the hardest hit, because whether they own or rent, the cost to live here will rise, while the benefits will fall.

Given the fact that over 700,000 people left California in 2018, coupled with the revised financial outlook, I would guess that more and more families and retirees will leave the state for greener pastures. Be ready.

The two monthlong and counting “stay at home” order is going to have implications that will last for decades to come. Stay well my friends and enjoy your money while it’s still yours.

Kim Murphy can be reached at [email protected] or (760) 415-9292 or at 130 N. Main Ave. in Fallbrook. Her broker license is #01229921, and she is on the board of directors for the California Association of Realtors.