The Observation Deck

If Lakewood was our 51st state, it would have by far the highest property taxes in the entire United States.

Lakewood’s 2018 effective property tax rate is 3.225% of a home’s market value (click here). As you can see below, a 3.225% effective rate puts Lakewood atop the five highest property tax states, and by a wide margin. To see the rates for each state, click here. (state %’s are state average):

Lakewood 3.22%
New Jersey 2.44%
Illinois 2.31%
New Hampshire 2.20%
Connecticut 2.07%
Wisconsin 1.94%

The problem is, especially as property tax rates keep rising, people are starting to flee states with high property taxes. See for example: High Property Taxes Drive the Exodus from Illinois (click here). There are literally hundreds of articles on the web that document the disastrous impact of high property taxes in states like Illinois, New Jersey, New York and California. As a result some jurisdictions are considering “exit taxes” in the form of punishingly high transfer taxes imposed on home sellers. For example click here. Chicago’s transfer tax (now over 1%) is already well over twice Ohio’s and they want to increase it even more especially on high-end homes. Illinois wants to double its exit (transfer) tax from .5% to 1.0%. This is just plain predatory. No two ways about it.

The property taxes we pay (presumably forever) are a financial “perpetuity.” Like an annuity but never-ending. The total (present) value of a perpetuity is easy to calculate, much easier in fact than for an annuity. It’s simply the annual payment amount divided by the discount rate. (The discount rate is like an interest rate.) I tend to use the 10-year Treasury rate when discounting payment streams, because it’s about the highest rate that is mostly safe from the loss of principal. Right now the 10-year Treasury is yielding only 1.98%. Back before interest rates were manipulated downward they were much higher.

So let’s say you own a $200,000 single-family home in Lakewood. Your annual property taxes are $6450 ($200,000 * .03225) year after year, forever. The value of that “perpetuity” of annual property tax payments is $6450 / .0198, which equals about $325,750. That’s WAY more than the home is worth, even assuming the taxes never go up! Let that sink in for a second. Your home is arguably worth less than $0 because thanks to property taxes, merely owning it costs more than its market value, even before you pay the mortgage, insurance, maintenance and the like. If it wasn’t for the fact that you have to live somewhere, a home would be worthless. Which is what makes property taxes so heinous. Ever notice that “property” taxes aren’t levied on stocks and bonds? Duh! It would render them literally worthless. Same with transfer taxes. Imagine what would happen to stock prices if state/local governments could levy transfer taxes when you wanted to sell stock.

Think of it like this. In order to pay the property taxes on a $200,000 Lakewood home, one has to immediately set aside $325,750, earning the 10-year Treasury rate.

Now, when it comes to financial matters, it takes people a while to catch on, but they eventually do. Plus, property tax rates have increased pretty slowly over time. But the homeowners in Illinois and New Jersey are now catching on and both those states are actually declining in population, even though the overall population is increasing pretty much everywhere else.

And remember too that for many people, beginning in 2018, property taxes are no longer fully tax deductible. That’s because the combined state income tax, local income tax and property tax burden for many people now exceeds the $10,000 cap after which such taxes can no longer be deducted for Federal tax purposes. That sunk in for many people last April 15. See for example New York, California high-tax state exodus just beginning, expert warns (click here).

There’s no doubt in my mind that Lakewood’s very high property tax rates will start impacting Lakewood’s residential property values, especially towards the higher end. Lakewood has some important characteristics that have helped our property values – our proximity to the lake and to downtown Cleveland, our inner ring vibe, and government schools that aren’t horrible. But don’t expect the value of a well-kept single-family home or better condo to appreciate any further. It won’t, and property taxes are the biggest reason why. And don’t expect many homeowners to invest substantially in home improvement, because you have to pay for them more than twice. Once to the builder and then again (and then some) to the schools/city/county/etc. And expect higher-valued Lakewood homes to start dropping in price, perhaps even dramatically. Judging by what I have seen near me, they already have.

Property taxes over 2% are really just a confiscation of real estate wealth.

Chicago, Illinois is often used as the poster child for uncontrolled spending and uncontrolled tax increases. Chicago and the State of Illinois are losing population and economic activity at an increasing rate. Fewer taxpayers are left to pay for existing infrastructure and pension obligations.

https://www.chicagotribune.com/news/ct- ... story.html

The voters and politicians do not care. One Chicago politician said that it didn't matter if people left because the remaining population would just pay more. When it was pointed out that property values would collapse the politician said that didn't matter because the property tax rate would simply increase to make up the difference. 5%, 10%, 15%? The sky is the limit.

The voters don't care because they keep voting for the politicians who kick the can down the road.

Chicago has the advantage that it still home to a lot of large corporations and a lot of wealth. Cleveland in general and Lakewood in particular is not.

Cuyahoga County continues to lose population and yet our politicians continue to encourage people to leave. How long can that continue before the market just collapses?

Tim Liston wrote:If Lakewood was our 51st state, it would have by far the highest property taxes in the entire United States.

Lakewood’s 2018 effective property tax rate is 3.225% of a home’s market value (click here). As you can see below, a 3.225% effective rate puts Lakewood atop the five highest property tax states, and by a wide margin. To see the rates for each state, click here. (state %’s are state average):

Lakewood 3.22%
New Jersey 2.44%
Illinois 2.31%
New Hampshire 2.20%
Connecticut 2.07%
Wisconsin 1.94%

The problem is, especially as property tax rates keep rising, people are starting to flee states with high property taxes. See for example: High Property Taxes Drive the Exodus from Illinois (click here). There are literally hundreds of articles on the web that document the disastrous impact of high property taxes in states like Illinois, New Jersey, New York and California. As a result some jurisdictions are considering “exit taxes” in the form of punishingly high transfer taxes imposed on home sellers. For example click here. Chicago’s transfer tax (now over 1%) is already well over twice Ohio’s and they want to increase it even more especially on high-end homes. Illinois wants to double its exit (transfer) tax from .5% to 1.0%. This is just plain predatory. No two ways about it.

The property taxes we pay (presumably forever) are a financial “perpetuity.” Like an annuity but never-ending. The total (present) value of a perpetuity is easy to calculate, much easier in fact than for an annuity. It’s simply the annual payment amount divided by the discount rate. (The discount rate is like an interest rate.) I tend to use the 10-year Treasury rate when discounting payment streams, because it’s about the highest rate that is mostly safe from the loss of principal. Right now the 10-year Treasury is yielding only 1.98%. Back before interest rates were manipulated downward they were much higher.

So let’s say you own a $200,000 single-family home in Lakewood. Your annual property taxes are $6450 ($200,000 * .03225) year after year, forever. The value of that “perpetuity” of annual property tax payments is $6450 / .0198, which equals about $325,750. That’s WAY more than the home is worth, even assuming the taxes never go up! Let that sink in for a second. Your home is arguably worth less than $0 because thanks to property taxes, merely owning it costs more than its market value, even before you pay the mortgage, insurance, maintenance and the like. If it wasn’t for the fact that you have to live somewhere, a home would be worthless. Which is what makes property taxes so heinous. Ever notice that “property” taxes aren’t levied on stocks and bonds? Duh! It would render them literally worthless. Same with transfer taxes. Imagine what would happen to stock prices if state/local governments could levy transfer taxes when you wanted to sell stock.

Think of it like this. In order to pay the property taxes on a $200,000 Lakewood home, one has to immediately set aside $325,750, earning the 10-year Treasury rate.

Now, when it comes to financial matters, it takes people a while to catch on, but they eventually do. Plus, property tax rates have increased pretty slowly over time. But the homeowners in Illinois and New Jersey are now catching on and both those states are actually declining in population, even though the overall population is increasing pretty much everywhere else.

And remember too that for many people, beginning in 2018, property taxes are no longer fully tax deductible. That’s because the combined state income tax, local income tax and property tax burden for many people now exceeds the $10,000 cap after which such taxes can no longer be deducted for Federal tax purposes. That sunk in for many people last April 15. See for example New York, California high-tax state exodus just beginning, expert warns (click here).

There’s no doubt in my mind that Lakewood’s very high property tax rates will start impacting Lakewood’s residential property values, especially towards the higher end. Lakewood has some important characteristics that have helped our property values – our proximity to the lake and to downtown Cleveland, our inner ring vibe, and government schools that aren’t horrible. But don’t expect the value of a well-kept single-family home or better condo to appreciate any further. It won’t, and property taxes are the biggest reason why. And don’t expect many homeowners to invest substantially in home improvement, because you have to pay for them more than twice. Once to the builder and then again (and then some) to the schools/city/county/etc. And expect higher-valued Lakewood homes to start dropping in price, perhaps even dramatically. Judging by what I have seen near me, they already have.

Mr. Liston,

Well done--and beyond debate.

Liston: "Now, when it comes to financial matters, it takes people a while to catch on, but they eventually do."

W. Wilson Caldwell: "We all learn late in life."

I keep telling my wife that we will not be able to afford to retire and stay in our home in Lakewood and still do the things we want to do.

My house in Lakewood has been the worst "investment" of my life.

The homes in my neighborhood take a long time to sell as compared to side streets in Lakewood and Rocky River or Bay Village lake front homes.

If Lyin' O'Leary is elected Mayor err Governor of the State of Lakewood, property values will continue to tank in relative terms--he is the dumbest elected official in Lakewood history---and many folks will likely not leave before they realize they've lost all "after real estate taxes" equity in their homes.

Lyin' O'Leary concealed his leadership in the $150 million give away in public assets and he is thirsty to take more and LIE more if elected.

back in high school the business teacher said something about homes being taxed at the price they were purchased for.
I don't know if that was true then or was changed later.
the county auditor and real estate pages have something called "assessed value" or "tax assessment value" that is usually much different than the most recent purchase price.

Bill Call says: “Property taxes over 2% are really just a confiscation of real estate wealth.”

That’s absolutely right but I think it’s more like 1%, given how low interest rates are these days. And a case can be made that it’s 0%. I get that people don’t understand the pernicious effect of artificially low interest rates. Which is how they get away with confiscating your real estate wealth. Though that’s not government’s rationale for low rates. Making property taxes unaffordable is a side-effect of artificially low interest rates. “Wealth” just doesn’t generate the returns it used to.

Something weird occurred to me recently. Say you remodel your home, perhaps you expand the kitchen. Presumably that adds value to it. The county thinks so. But, per my original post above, your property taxes over time increase by more than the value you (presumably) added by remodeling. That’s not conjecture. At 3.225% a year it’s a mathematical certainty.

So perhaps we should all consider de-modeling our homes. Remove the granite counters and put back in the Formica. Go find some old sculpted carpeting and put that over the hardwood floors. Get rid of the stainless steel fridge and put in one of those old avocado green monsters. Install tiny little closets and demolish the kitchen addition. Get rid of the central air and put in window units. Let the landscape go to hell.

By doing these things, if the “assessed” value of your home is appropriately reduced, you increase the value of your home. Sooner or later. That’s because the commensurate reduction in your property taxes exceeds the lost market value of your home. Just as improvements to a Lakewood home cause a more than commensurate increase in property taxes, diminished value will cause more than a commensurate reduction in property taxes. Hence, de-modeling your home increases its value!

Yeah I know it sounds absurd. But it’s not. Sooner or later property taxes are going to make a BIG difference in what homes sell for. The fact is, they already have. Especially at the high end of the market. Which is why my financial assets have performed far better than my real estate assets. My financial assets are not taxed at 3.225% annually. The home I paid $256,500 for in 1995 is now said to be worth $380,000. If I had invested that $256,500 (and 25 years worth of property taxes) in a mix of stocks and bonds I’d have $1.9 million. I remember a few years back when it got so bad in Greece that heirs repudiated their real estate inheritances. We’re headed that way here….

the prices are higher than the last bubble. That will go one way or the other.

to a degree Lakewood's tax rates are to insulate it from certain elements of Cleveland.

If you purchased a home in a more affluent suburb or region, you would have less principle to invest in financial markets, and still have to pay whatever property taxes are there.

This is from the City of Westlake:
The medium home value in Westlake is $275,200. Property tax on the medium value is $6,797.

The medium home value in Lakewood is $186,700. Property tax on the medium value is $7,468.

Westlake also offers a 100% income tax credit.

Tim, your analysis is correct but don't expect to get anywhere. The only real solution is a constitutional amendment to limit property taxes. It's never going to happen.

The City of Chicago and the State of Illinois are set to increase property taxes to (hold on to your hat) make housing more affordable!

https://cookcountyrecord.com/stories/51 ... -s-expense

Lakewood residents are also set to pay twice as much as Westlake water and sewer rates. Don't expect to get anywhere with that argument either.

Lakewood residents are also set to pay twice as much as Westlake water and sewer rates. Don't expect to get anywhere with that argument either.

Suburbs who purchase water from Cleveland, as most do, pay more or less based on distance. Lakewood should have lower rates than Westlake.

And expect higher-valued Lakewood homes to start dropping in price, perhaps even dramatically. Judging by what I have seen near me, they already have.

I think we had a little bubble that burst.

Homes are not only sitting on the market longer, prices are being lowered to sell them.

Just look at any realty site and see the current available houses, dats on market, and price cuts.

Even houses on Edgewater, in great condition, are not moving without drastic price cuts.

I think we all knew it would happen.

Brian has been reporting for some time that there's been no bubble by the lake.

The premise of this is funny, Tim.

Comparing a single city (a densely populated, 100+ year-old inner ring suburb that doesn't have any industrial tax base) to any state-wide average (rural places, new suburbs, and all) is not really shedding light on anything.

Of course you know this.

Why do you do it?

Taxes play an important role as a factor in location decisions.

Why do you think people from Cuyahoga County are leaving for Medina, Lorain, and Lake counties?

In fact, some prominent Lakewood boosters are on their way to Lorain county. I know more than I can to say about those abandoning this area to head to lower taxes.

It’s a fact.

Of course taxes are one of the things some people consider when they decide where to live. I did choose Lakewood without comparing tax rates here to those in, say, Rocky River or Bay Village or Avon, because this is where I want to live, and those cities don't offer much of what we find appealing about this city. And I am sure a lot of home buyers and renters choose Lakewood despite its high taxes. Apparently that is true. Something over 50,000 people live here. Still, that is not the point.

My point is that comparing the tax rate of one densely populated, 100 + year old inner ring suburb without an industrial base with the average tax rates of entire states --ex-urbs, rural towns and all--doesn't really make a useful comparison.

My point is that comparing the tax rate of one densely populated, 100 + year old inner ring suburb without an industrial base with the average tax rates of entire states --ex-urbs, rural towns and all--doesn't really make a useful comparison.

Why not?

Because we have no industrial base? There are thousands of towns and cities without one.

We are old? Well Ohio has plenty of old towns and cities.

What would you compare it to, then?

Any specific city would be a start.

A city similar to Lakewood would be more effective.