We take issue with the latest Morton Marcus IBJ column

Dr. Morton Marcus doesn't seem to mind irritating those around him (as he indicates in his bio) and there is something to be said for his contrarian style. However, his latest column in the Indianapolis Business Journal (you can view it here through the Indiana Economic Digest) casts aspersions about our industry. It implies that REALTORS® conspire to lead homeowners to over-leverage themselves, and this is why Indiana has a high rate of foreclosure.

IAR has already responded in a letter to the IBJ, and here is the text:

On behalf of Indiana’s 18,000 REALTORS®, I am compelled to respond to the column by Morton Marcus titled “How Home Buyers Step Off a Cliff”. Unfortunately, after stating that “no one knows” why Indiana has such a high mortgage foreclosure rate, he doesn’t let this professed lack of knowledge stop him from offering a slew of opinions.

The mortgage foreclosure problem in Indiana is well documented, and there are no industries that have more of a stake in seeing it addressed than the real estate industry. Foreclosures take a tremendous toll on families, neighborhoods, and real estate markets. Marcus’s suggestion that REALTORS® benefit from these unfortunate situations is, frankly, offensive.

The Indiana Association of REALTORS® has taken many steps to educate members and policy makers on the extent of the foreclosure problem. We have conducted education seminars, published research, and participated in coalition efforts with consumer and affiliated industry groups. We petitioned the state legislature to raise our licensing fees for use in policing our own profession, just to make sure we were doing all we could to enhance consumer protection. In addition, the National Association of REALTORS® has been lauded in the national press for a campaign undertaken with the Center for Responsible Lending to educate homebuyers about the dangers of the very loans referred to by Mr. Marcus.

I have had countless conversations with REALTORS® offering their assistance on this issue. They understand the costs, both emotional and financial, that foreclosures extract from their communities. Successful REALTORS® are successful because they provide professional, ethical services. They depend on referrals and satisfied customers. They depend on the health of their markets, and the economic vitality of their communities. They certainly have nothing to gain from their communities being racked with foreclosures.

We do agree with Mr. Marcus that one should watch one’s step when purchasing a home. That is exactly what REALTORS® help consumers do every day.

Karl Berron, Vice President
Government Relations
Indiana Association of REALTORS®

We suggest Dr. Marcus read the report commissioned by IAR and the Metropolitan Indianapolis Board of REALTORS® entitled "Rising Foreclosure Rates in Indiana: An Explanatory Analysis of Contributing Factors". One key factor is that the average statewide home price appreciation has been just above inflation in the last five years, and this leaves homeowners "upside-down" and unable to recover transaction costs in the event of a job loss or other financial setback.

We would agree that relatively high loan-to-value ratios are partly to blame, but this is in no way the fault of REALTORS®. This is surely a function of slow personal income growth in Indiana that leaves first-time homebuyers with fewer dollars to put down. And for Hoosier families moving to larger homes, the slow price growth that has plagued Indiana leaves less equity to convert into the new downpayment.

Far from contributing to foreclosures, IAR and local associations are committed to promoting economic development so that the conditions for high foreclosure rates no longer exist in Indiana.

There is much more to be said about Dr. Marcus's article. For example, he cites a list of metro areas where Indianapolis ranked highly in the percentage of mortgages with a loan-to-value ratio above 90%. But if Hoosiers were "dreamers" led astray buy the real estate industry as Dr. Marcus posits, wouldn't Indianapolis rank highly in the use of risky interest-only loans? It doesn't. In fact, it ranked 47th out of the top 50 markets in 2004 according to this BusinessWeek Online article.

Even when it comes to plain old variable rate mortgages, Indiana had the lowest percentage of adjustable rate mortgages (ARMs) as as a share of total loans in 2004 when compared with surrounding states. The share of total mortgages orginated as ARMs in Indiana was only 27%, which was lower than Ohio (30%), Michigan (33%), Kentucky (36%), and Illinois (49%) according to data from the Federal Housing Finance Board. There is no reason to think that Hoosiers are more reckless borrowers than citizens in our neighboring states.

The foreclosure problem in Indiana is serious, and this industry is committed to solutions. Irresponsibly pointing the finger at REALTORS® does nothing to improve our situation.

New property tax break for REALTORS® and other small businesses

The Fort Wayne Journal Gazette's Niki Kelly covers an under-reported product of the 2005 legislative session in this article. "Automatic abatement" or the Property Tax Investment Deduction is a new tax break championed by Governor Daniels during his campaign. The article quotes State Senator David Ford in explaining that this tool was designed for small businesses:

"“The big difference is this is automatic and it’s over a shorter term, which means it’s not quite as good as the old abatement, but you don’t have to go through all the channels and bureaucracy to get it done,” said Sen. David Ford, R-Hartford City. The deduction was part of a larger economic development bill carried by Ford in the 2005 legislative session."

Any REALTOR® considering renovating office space or upgrading office equipment (including information technology) should learn more about this deduction. The only catch is that the investment has to create or retain jobs. How will that be judged? That is the $64,000 question.

I will link to the guidelines when they are published by DLGF. But I would suggest reading the article for now, as the author has done a great job in outlining the basic requirements and potential issues in administration. If you want more detail, you can read the legislation (SEA 1) here.

IAR supported this concept as a way for small businesses to avail themselves of economic incentives usually reserved for large corporations. But if deductions are granted for large amounts of investment that would have occurred anyway, automatic abatement can slow down the growth in assessed value of business property. The downside for our industry is that this would shift the property tax burden to residential property.

However, we remain optimistic that this program will spur investment. We will provide more information on this credit on the IAR website soon— watch this blog for news when this becomes available.

Blogging on blogs: number of real estate weblogs growing

Just a quick note on the popularity of this medium from one of the most visited real estate blogs:

"Our observation is that the number of real estate blogs is growing! A quick search of Google for the term "real estate blog" produces 137,000 entries (note which real estate blog is listed first ... a shameless plug). We feel this is good news for all. A blog is a good way for a realtor to stay in touch with their clients, and provide information. And, of course the public gets the benefit of the information!"

Welfare property tax levies coming under scrutiny again

Today's Gary Post Tribune writes about the changes in the way the local children's welfare levies are set (a result of SEA 529 from this year's legislative session) and the reaction from a key lawmaker. Policy makers have examined this issue numerous times. For example, in 1996, the Indiana Fiscal Policy Institute recommended that the state assume a greater share of the burden in its paper, "The Child Welfare System in Indiana". And when then-Lt. Gov. Kernan announced his "21st Century Tax Plan" that kicked off the tax restructuring debate, he advocated for state takeover of the Family and Children's Fund along with other welfare and court costs currently paid for locally.

It has been estimated that under SEA 529, more than 40 counties may seek a total of $40 M in excessive levies for the Family and Children's Fund next year. Perhaps resulting pressure will generate more discussion on shifting some of these costs to the state.

Welfare tax gets state glance
Aug. 26, 2005
Jim Stinson / Post-Tribune staff writer

The welfare woes of both Porter and LaPorte counties have caught the attention of state lawmakers.

But relief is still up in the air, as lawmakers must decide what kind of change should be made in how assistance to families and children is funded.

“There’s always been a desire to take welfare to the state level,” said state Rep. Jeff Espich, R-Uniondale, the chairman of the Indiana House Ways and Means Committee.

Espich recently spoke in LaPorte County at a business conference on the issue.

But Porter Circuit Court Judge Mary Harper said even despite the doubling of the welfare budget, Porter County and state leaders should be cautious about supporting a statewide welfare system.

“If we get into a system where we have to pay for all the (state) children ... the tax rates are going to go sky-high,” Harper said. “We’re paying a lot less now.”

Harper disputed a basic analysis by the Post-Tribune that stated the increase could cost a home owner with an assessed value of $100,000 an additional sum of $50, or $100 in new taxes for a property owner whose house is assessed at $200,000.

“There’s a good chance it won’t be that high,” Harper said.

Harper said many tax credits and exemptions will be available to the homeowner before the tax rate is applied.

“These include the homestead credit and the property tax replacement credit,” Harper said. “Also with the county economic development income tax ... decision, the homestead credit will go up next year, further reducing the tax for this fund.”

The bottom line is a $25 increase in annual payments for most Porter County homes with a net taxable value of $100,000, Harper said. Harper and other county officials cautioned numbers, including overall assessed valuation, still need to be crunched by the state.

A more feasible welfare budget will help Porter County maintain its services for Family and Children without getting tied into paying for other counties, Harper said.

The issue broke at the beginning of the month when Porter County Council President Bob Poparad held a public meeting inquiring about Senate Bill 529, which he said loosened levy limits on the Family and Children fund.

The fund surprised the council when John Rutkowski, director of Porter County Division of Family Resources and Department of Child services, requested about $8.2 million for 2006.

The 2005 budget was $3.276 million. The council approved a $6.9 million budget.

Rutkowski said the department was also $2.2 million in debt, and both Harper and Rutkowski told the council that the department had been traditionally underfunded.

Espich said the tweak in state law is being blamed in the place of funding shortages that counties like Porter have ignored while its welfare department went ahead and spent what it needed anyway.

Higher budgets than planned could have been spent through an appeals process or judgment bonds, Espich said.

All the bill did was eliminate some bureaucracy and empower the state’s executive branch to establish the levy directly, Espich said.

This was also the case in LaPorte County, which also suffered from sticker shock when it saw its new welfare budget.

On Thursday, the Porter County Council approved a 111 percent increase in the Family and Children fund of the county budget.

Espich said reducing the welfare burden on property taxes is one way to follow up on Gov. Mitch Daniels’ promise to help counties reduce property taxes.

But Espich said no specific legislation to differently fund child and family services has been written yet for the upcoming session.

Contact Jim Stinson at 477-6017 or jstinson@post-trib.com

Should all assessing be done at the county level?

This article is actually from several days ago, but really is worth pointing out. The Peru Tribune reports that a township trustee assessor in Miami County has apparently not turned in required reports to either county government or the state for some time.

IAR supported a bill in the last session of the General Assembly (SEA 308) that would allow counties to withhold the part of an assessor's salary that is associated with real property assessment unless certain certifications are obtained by the assessor. It also allows a county to take over the real property assessment in a township if a trustee assessor fails to meet the required certifications. This is a long way from consolidating assessment at the county level as has been recommended by the non-partisan Indiana Fiscal Policy Institute, but it is a step in the right direction.

By the way, here are some fun facts from the Legislative Services Agency on the number of assessing officials in Indiana and their certification levels:

As of January 2005, of the 1,008 townships in the state, 177 had elected assessors and 831 had trustee assessors. With respect to certification levels, 11 county assessors had obtained a Level I and 71 had obtained Level II. For elected township assessors, 16 had attained Level I and 107 had attained Level II. For township trustee-assessors, 68 had attained Level I and 63 had attained Level II.

Property tax confusion

As this Fort Wayne Journal Gazette editorial from Sunday points out, one of the most maddening elements of Indiana's property tax system is its complexity. Because each taxing district is made up of multiple units, there is a lack of direct accountability. The General Assembly has made some improvements in this area; today's Indy Star contains an oblique reference to SEA 1 from 2004 in an article about control over the Marion County library's budget. However, there is still a long way to go to bring real transparency for Hoosier taxpayers.

“It is very difficult for people to take a look and see where their taxes are going,” said Steve Johnson, president of the Indiana Fiscal Policy Institute, the non-partisan, non-profit agency that examines Indiana’s tax and budget systems. “You don’t have any one particular place where there is authority and responsibility.”

Northwest Indiana: The state's bright spot for home price appreciation

This Northwest Times article indicates that many homes in northwest Indiana are bucking the state's trend of slow price appreciation discussed in an earlier post, and owners are realizing solid gains in value:

"The median selling price of a home in Northwest Indiana in June was $141,900, a 9. 2 percent increase from last June. Nationally, the average sales price of a single-family home was $218,600, up 14.5 percent from a year ago."

Star feature on slow price appreciation in Indy

The Indianapolis Star reported last week on the relatively slow price appreciation in the Indy area relative to other large metro areas. The article presents some pros and cons; for example, there is likely no "bubble" that may burst.

However, we at IAR have researched Indiana's high rate of foreclosures and found strong links to slow home values gains. We also know that household spending and related economic activity are hampered by slow price gains. It is important to maintain affordability and market this advantage with respect to economic development, but we must also grow the economy to reward homeowners with stronger, steady appreciation.

The article features this quote from Gary Warstler, Executive Vice President of F.C. Tucker & Co.:

"It's a very good neutral market -- not like California or New York. Houses are not skyrocketing, so people don't have to be concerned (about a sudden decline)," Warstler said.

Tax appeals and questions about local government's structure in St. Joe County

IndianapolisWorks, government consolidation discussions in Allen and Vanderburgh Counties-- is this issue gaining momentum? This South Bend Tribune article describes problems with Indiana's system of local property tax administration that have left a backlog of appeals from the 2002 assessments still unsettled.

"[Commissioner Mark Dobson] said it shouldn't be necessary for the commissioners to be injected into a meeting with the assessors and their problems. "Our current form of government is broken," he declared. He also revived his earlier suggestion that county government be more centralized, the township assessors eliminated, and positions such as the county assessor and county recorder changed to appointed rather than elected offices."

Indiana's slow home price appreciation leads to foreclosures

The Greater Lafayette market is struggling in the area of home price growth-- you'll have to scroll far down on this ranking of MSAs to find Lafayette. The Journal and Courier has been writing a lot about the local building booms and home value busts, and an excellent example was published Sunday:

"Since January 2004, an average of 23 foreclosed homes a month have been scheduled for auction by the sheriff of Tippecanoe County. It's an unprecedented number, officials say, that affects not only the homeowners but the community at large."

The Indiana Association of REALTORS and its partners commissioned a study on foreclosures last year that demonstrated the linkages bewteen slow home price growth and an increased foreclosure rate.

Senate Bill 1 (2004) impact?

This article from the Muncie Star Press indicates that the property tax controls imposed by SEA 1 in the November 2003 "mini-session" are having an impact:

"Delaware County collected $5 million more in property taxes in 2004 than allowed by state tax controls. That could mean some local governments and schools face budget shortfalls in 2006 while taxpayers would see some unexpected tax relief."