Why Property Taxes Must Be Cut

by: Vahan Janjigian, CFA

According to the S&P/Case-Shiller 20-city Home Price Index, housing prices peaked in July 26. They have fallen 23% through October 2008. With employment falling, housing prices will no doubt go lower in coming months.

If there is any good news in this, it is that the affordability index is improving. This index tries to give us some sense of how affordable the median priced house is for the median income family. In addition to housing prices, the affordability index considers mortgage rates, which have also come down largely due to government intervention.

Unfortunately, the affordability index ignores an increasingly important cost of home ownership: property taxes. Prospective home buyers in many parts of this country, especially the Northeast and Midwest, must pay close attention to this cost before signing on the bottom line. For many homeowners, the monthly outlay for property taxes now rivals their monthly payment toward principal and interest.

This economic recession we are currently struggling through was largely brought on by the collapse of housing prices. The recession won't end until housing prices stabilize. Lower mortgage rates are certainly helpful, but reducing property taxes would go a long way to provide a much needed boost to the housing market. Obviously, the federal government has no role here. It is up to local municipalities to cut property taxes. Like the rest of us, they need to trim their budgets and live within their means. Otherwise, more neighborhoods will be plagued with vacant and foreclosed homes.