[Continued from yesterday's Part 1.]

In yesterday’s exploration, we suggested that if you want to understand a housing finance ecosystem and lack the statistics or reference resources to compile a proper survey, you can do well by conducting a simpler ‘physical exam.’

Is that all I am to you, just a pretty johnny?

Any given housing finance ecosystem processes activity across three dimensions – homes, people, and money.

Locate yourself in space and you define yourself relative to others

By poking and prodding the system as it processes residences, occupants, and money, you can deduce its functions.

I’m sure one of these links to her motivation

Yesterday we covered the concept and Question 1, how do I find housing, and what types are available?

Once you’ve found your desired pied a terre, you have to secure possession. 

Question 2: Selling and buying

If I own housing and you want to own it, how does the system recognize transfer of ownership from you to me?

You’ve found a place you want to own – my place – and I’m ready to sell it to you for an agreed price.  I need your cash; you need evidence that you’re the owner now.

A Turkish title deed: note the owner’s picture!

Between us and the transfer stand a host of professionals who specialize in these handoffs.  Who handles what, what documentation (pieces of paper), what do they say, how are they prepared and signed, who holds them?  What certificates, what protections, what recourse to authority?

You’ll have questions like these:

1. How do you know I own it?
2. What defines my property?   Does it include land, outbuildings (garage, shed), furnishings and fixtures, utilities and systems?  How are its boundaries specified, and why is that specification accepted in the wider world?
3. How can you later prove that you have now acquired ownership from me?
4. Via what piece of paper (if any; in some places, understandings are verbal) is my ownership currently documented?  A deed of title, a purchase receipt from a previous owner?
5. Where can you expect to find or examine my documentary proof of ownership? How do we designate a neutral repository (escrow agent, lawyer, realtor) to hold the valuables – money and certifications like title deeds – while we’re preparing for the closing?

This question gets to the roles and services in the title transfer value chain, both the governmental side (recordkeeping, recognition of transfer, and neutral enforcement) and the private side (professionals involved) and will touch on all these real or potential professionals:

• Closing attorney to prepare the new title deed (and the purchase and sale that precedes it).
• Registry clerk who places in the new title in the great big book and gives you the filing and recordation information.
• Title insurer.  Warrants that your new title is good, and will pay you the property’s value if that proves false.
• Real estate broker or estate agent.  Match-makes between sellers and buyers.  Brokers always face the question of who works for whom.
• Mortgage broker.  Represents you in searching for the best financing.
• Surveyor makes a detailed and personally inspected map of your demesne (pronounced domain), so as to provide the metes and bounds. 

Everything inside the rock wall is my demesne

(Love that Middle English!)

Whan that blogger with his essayes wroote
The metes and bounds hath posted the Web soote,

Depending on where you are in the world, and what type of residential property you’re seeking to transfer, you’ll encounter more or fewer of these folks.  Each check you write, at the closing table or before it, pays for a link in that value chain, a link done by a professional who is (usually, or at any rate supposed to be!) more expert than a generalist, and a vast leap over your effectiveness if you tried to do it yourself. 

The more checks you write at the closing table, the better your ecosystem; while I won’t claim this postulate as absolute fact, that’s my instinct. 

That’s pretty basic, isn’t it?

How do you the newcomer learn about the mechanics of property transfer?

In most developed nations, that’s pretty simple – just Google “home purchase closing” or similar phrases.  Further, many countries have consumer-protection or consumer-disclosure laws that make it easy to learn what you need to know.  In the US, for instance, we have:

The Real Estate Settlement Procedures Act (RESPA), which has been around for 35 years (since 1974, holy moly) as a consumer protection statute:

We need settlement procedures

1. RESPA requires that borrowers receive disclosures at various times. Some disclosures spell out the costs associated with the settlement, outline lender servicing and escrow account practices and describe business relationships between settlement service providers.

2. RESPA also prohibits certain practices that increase the cost of settlement services. Section 8 of RESPA prohibits a person from giving or accepting any thing of value for referrals of settlement service business related to a federally related mortgage loan. It also prohibits a person from giving or accepting any part of a charge for services that are not performed. Section 9 of RESPA prohibits home sellers from requiring home buyers to purchase title insurance from a particular company.

Additionally, any professional association (like the US realtors) will have extensive exposition, and a little bit of poking around will reveal dozens of law firms eager to let you download standard agreements.  Indeed, looking for the forms will also surface the types of practitioners who specialize in transactional services, and they in turn will lead you back to the sequential steps.

Similarly, the settlement statement – a standard form listing what costs for what services might be paid at the closing – acts as an effective checklist of possibilities.  A good example is the HUD-1 settlement statement (link in .pdf), which zeroes in on possible costs, as shown in the large image below.

If HUD thinks you might be paying these, there’s probably a good reason why

Well-developed (and typically higher-income) ecosystems have these mechanics down pat, so much so that everyone takes them entirely for granted.  As a result, first-world investigators who travel to developing nation environments often presume they know how the system works when in fact they don’t.

Hence it’s important, in less-developed ecosystems, to forget everything you think you know about the property transfer value chain, and start from first principles.  One learns by asking the same questions, over and over again, walking step by step through the imagined process and collecting samples of the documents along the way.  Most significantly, how the process works in the formal world of mortgages and electronic records often differs dramatically from how it works in the informal world of unregistered property, cash transactions, and verbal rather than written rights.

Tracing the mechanics of a transfer of ownership, and the recognition/ enforcement of that transfer, also expansively touches everything to do with the broader society and property rights – and that, being one of the pillars of a liberal democratic society, provides a window into government’s functionality, integrity, and legitimacy.

Somebody’s worried

However, such speculations into political philosophy would take us ‘beyond scope’ (as the compleat consultant would say), so let us stay with the more prosaic element of that single dwelling unit.  You’ve located and chosen it, you’ve agreed with its owner about your occupancy.  Now you have the last piece – you have to pay for it.

“Hamburgers!  The foundation of any nutritious breakfast.  Do you know what a quarter-pounder costs in France?”

[Concluded tomorrow in Part 3.]

Send post as PDF to

By: David A. Smith

If you get a new doctor, what’s the first thing he or she does – after establishing how you or your insurance will pay, of course? The physical exam.

We make them cold so that we know you’re dead if you don’t flinch

When we don’t know how a system works, what do we do? We palpate it.

Tell me if this hurts

We shake it and hear the rattles.

Louder sounds are better, aren’t they?

We twiddle the knobs and observe the changes.

Wonder if this detonates it?

Indeed, long before we had any taxonomic understanding of medicine, we tracked biological processes by their outputs, whether in reading the entrails of a goat or examining the patient’s stool.

What comes out reflects what went in …

… and what happened to it on the way through

In the modern era, we do the sample systemic analysis remotely, with radioactive isotopes that serve as tracers through the body, highlighting circulation and concentration, learning about the system by following particles on their way through it.

If I were you I’d worry about the glowing parts

In the same way, when we consider a housing finance ecosystem, the blood plasma is money, and its tracing is a time-honored investigative technique.

“Follow the money”

When it comes to housing, the money moves in three dimensions: homes, people, and money:

1. Homes. Providers and consumers finding each other.

2. People. Sellers and buyers exchanging money for consumption and use rights.

3. Money. Capital providers and capital consumers financing a home purchase.

Understand these three dimensions and you go a great ways toward placing an ecosystem in its space.

Thus, if you come new to a housing finance ecosystem, either because you’re visiting a country and want to buy or rent a home, or as a student, researcher, or consultant tasked with designing a new program intervention, you can learn a lot about the ecosystem if you follow the money through each of its three dimensions.

Use all three eyes and you’ll see the full dimensions

Keep on truckin’ for insight

The investigative technique

To understand each process, follow it step-by-step, actor by actor, cost by cost. Take a journey through the system, getting up close and personal with each of its elements.

Pretty fantastic voyage, if you ask me

Imagine yourself starting the journey, a hopeful fool empty of knowledge, and ask yourself, How do I encounter? How do I interact? What money changes hands, how and for what purpose?

My ignorance and my bundle are soon parted?

Question 1: Owner-consumer value chain

If you have housing (to rent or sell) and I need housing (to occupy or buy), how do we find each other and what kind of tenure relationships could we establish?

You’re new in town, and you need a place to live. Think of all the sub-questions you’ll have.

1. Can I find plenty of places, or are they scarce?
2. How much space can I afford?
3. Can I buy or do I have to rent?
4. If I want to buy, how far out of downtown do I have to be?
5. Is there enough good-quality rental?
6. Is the government in the business of providing housing?
7. Is the government in the business of subsidizing the supply side (helping create more homes)?

Now I’m going to ask you a simple question – do you feel … lucky?

This simple question – what housing is around? – gets at everything to do with the supply, flexibility, and affordability of housing:

• Ranges of tenure. Ownership, condo, co-op, shared ownership, rental, affordable rental, rent-controlled rental, roommates, public housing. Which of these are formal, which informal? What gray tenures exist (like in-laws apartments, illegal sublets, or overcrowded student housing)?
• Diversity of configuration. Apartment types, bedroom counts, flats or gardens or townhouses or duplexes or free-standing bungalows.
• Cost and affordability. What percentage of income do households pay for occupancy? How does this vary by tenure? How are utilities provided, and who pays them?

How do you the newcomer find out housing supply, configurations, tenures, and costs?

• Ask people.
• Apartment guides.
• Newspaper advertising.
• Banners and flyers and signs. (Learn how they advertise FOR RENT and FOR SALE.)
• Realtor/ real estate broker/ estate agent shop windows. Nancy and I have got into the habit of staring at these pretty much anywhere we find them. We’re always astonished at how little you get for your money in the UK or Europe.

Each window pane is another comparable

(Except the Uncle Sam, who wants You to Buy)

Remember, every form of configuration, tenure, and price point exists because somebody thinks that’s the right niche for some fraction of the market. By their homes ye shall know them.

Further, the question also opens a window into the property-transfer value chain, including what types of markets link property providers (owners and landlords) with property consumers (renters and buyers), and conveniently bringing us to the second question.

[Continued tomorrow in Part 2.]

Send post as PDF to

So there I was, mid-May in Dublin at the Foundation for Fiscal Studies’ 24th annual gathering, The Fiscal Treatment of Property, expanding on the topic Lessons from the United States and explaining US real estate taxation to a roomful of tax wonks. 

Class, can you say ‘locally autonomous control’?

[Click here to access my whole presentation, in pdf.]

You may not think the subject gripping, but they did, because they’re giving serious consideration to introducing annual real property taxes after thirty years without any, and they know that doing so is political dynamite.

Just propose raising taxes, and run

If you’re going to do this, I advised them, link local taxes to autonomous local control of visible local services: schools, police, firefighters.

Local control over real estate taxes also allows low dexterity in managing economic growth and property development, particularly via the use of targeted incentives, including:

PILOTs and redevelopment areas

1. PILOTs.  Payments-In-Lieu-Of-Taxes, where a municipality can structure any arrangement it

PILOTs require state-level authorization, and tend to be popular only in slow-growth already-urbanized areas with reliable high land values and a death of affordable housing, as evinced by the three states I cited (Massachusetts, New Jersey, and New York).  In lower-value states where other revenue sources are hard to come by and even the local real estate taxes are seen as expensive and hence a political risk, the tax man tends to be more aggressive with the assessments and the city council tends to be stingy with the abatements.

Even 121A couldn’t save the Jamaica Plain shoe factory

Originally these state enabling statutes were aimed at protecting industrial real estate, such as Massachusetts’ hopeless quest to keep the shoemaking business, but after those industries all collapsed in the Fifties, killed by the air conditioner which enabled them to transplant to the Southeast and Southwest, the late-Sixties saw them reused for affordable housing, which is today the dominant claimant for PILOTs.

2.  Redevelopment Areas (RDAs).  Another local-option initiative targeted to high-growth, high-density, high-value markets.  In an RDA, the locality draws a boundary around a core area, usually the central business district or an expanded downtown.  Expecting growth within the designated area, the locality seeks to assure that the rising real estate values do not totally price out affordable housing.

RDA map

Land value being a residual, these localities know they cannot stop prices from rising, so instead they take a portion (10% to 25% is common) of the increased real estate tax revenues derived from rising values within the RDA, and siphon that into a reserved ‘Housing Set-Aside Fund’.  HSAF proceeds are typically accumulated and lent out as soft debt to fund increased affordable housing.

Linkage, incentives, and Community Preservation

In addition to those two direct manipulations of the amounts or uses of real estate taxes, I highlighted three other American taxation/ land use initiatives, all of them locally generated and locally controlled. 

3. Linkage.  Linkage, as it has come to be named, has a more controversial reputation because of its targeting.  Within a designated area – again, usually a high-value zoning-constrained high-demand section of the city, usually the central business district – the city requires any up-zoning proposal to provide new affordable housing ‘linked’ to the new development in a stipulated ratio: so many square feet of new affordable housing for each hundred square feet of increased density approved.

Linkage’s structure flows from impeccable economic logic.  Most downtown developments are non-housing uses – retail, hotel, office – which generate jobs.  Good, but with those jobs come people, and the people either need housing locally or add to the traffic burden.  Either way, unless affordable housing is advantaged somehow, the non-housing uses will increase, exacerbating exclusion and traffic congestion – unless, that is, affordable housing is ‘linked’ to each incremental non-housing development, to keep the uses mix in balance.

Linkage comes in many forms.  Some are formulaic: X square feet of new affordable for Y square feet of non-housing.  Some are custom-negotiated, like the UK’s Section 106, whose design flaws I’ve already chronicled (at length). Some, like the Union Army during the Civil War, allow substitution – instead of delivering value in kind, the developer can simply pay a surcharge of $Z per square foot of increased zoning. 

How many of them were bought substitutes?

It’s this last that gives linkage its poor reputation in some quarters, as it smacks of the papal indulgence, or a bald toll to purchase approved up-zoning (instead of having each upzoning request considered on its own merits as being good or bad for the city’s development).  Further, unlike RDAs, linkage is zero-sum; every dollar of affordability delivered (either directly via affordable square feet or indirectly through linkage transfer payments) is one dollar less of land value.  Done clumsily, or to excess, it looks less like urban planning policy and more like a gotcha tax (whose motto is the Latin for, “because we can”).

I make the rules

Linkage is the flip side of PILOTs – taxing some properties higher or lower based on their perceived contribution to or deduction from the city’s overall use-of-property balance.

Too much reliance on one thing?

4. First-time homebuyer incentives.  Like linkage, homebuyer tax-credit incentives (like the Washington DC homeownership tax credit) are a one-time rather than an ongoing payment, and perhaps could have been excluded from my talk, but I included them as further illustration of how the community, if given local autonomy over zoning and real estate taxation, can customize extensively.

5. Community Preservation Acts.  I’m on record (four years ago! how blogging time flies) as endorsing the Community Preservation Act as a case study in good incentives, although in the intervening four years I’ve cooled somewhat after posting about localities, who saw the money just sitting there, snitching it for just-any-other purpose:

Such a problem is illustrated, unfortunately, by the expenditure creativity being displayed by various cities and towns around Massachusetts as they transmogrify the original legislative purpose of the Community Preservation Act’s money into … well, whatever they can think of. As revealed by yet another insightful policy article from MassInc’s, free CommonWealth magazine:

Moving the goal posts

Designed to create open space and affordable housing, the CPA is now being used to pay for sidewalks and artificial turf

If I write the rules, there’s no rule against it, right?

Where the ring-fencing breaks down, the CPA is just another surtax – and worse, because it flows via state match to localities that voted the override, it turns out to be reverse redistributive, giving  more to richer communities and less to poorer ones.

Finally, I devoted only a fleeting commentary to the implications of a real estate downturn on local finances:

Subprime’s consequences

All strung und drang aside, US foreclosures are concentrated in five states that can be divided into three conceptual categories:

1. Weak long-term economy (Michigan) dragging down values.

2. Speculative overbuilding run amok (Arizona, Florida, Nevada) because of low barriers to entry.

3. A whipsaw of overbuilding and skidding economy (the one and only California).

In light of all that, how do the US and Ireland compare?

Through the looking-glass: two ways of taxing

Ireland’s taxation is predicated on building and reselling of housing.  When times are good for the property market, government is awash in cash.  When times are bad, the cash dries up completely.  That’s probably contra-indicated because it’s in bad times that government is called upon to do more, and in good times it probably should do less. 

In short, I told my hosts, from what I could see of the US, and what little I understood about Ireland, a move to a recurring real estate tax on residential property would be wise – and the only way to do it without committing political suicide would be to connect it directly to increased local autonomy over visible local services. 

When the institute issues its report, I’ll let you know what they recommend.

Somewhere, over the rainbow, taxes work

Send post as PDF to

No real estate tax escrows collected by your mortgagee. 

No assessments, no city assessors.

Before you smile too broadly, I have to mention some other George-Spiggott-inspired conditions of the scenario:

I want only your immortal soul

No local autonomy on schools, police, fire, health.  All would be funded from the national government in decisions where you had no input.

Nevertheless, your property would not be free from tax.  On sale, you’d pay a transfer tax fee, collected by national government, which rebated money back to your community. 

Would you be happy or sad?

There is such a place.

Irish revenues have fallen off the cliff

The Republic of Ireland. 

In 1978, Ireland abolished local property taxes, and substituted a 6-7% ’stamp duty’ (real estate transfer tax).  From the mid-1990s onward, with the EU, the Euro, and the common European marketplace, immigration swelled Ireland population by 35%, adding about 1,500,000 people and over 500,000 new homes.  Prices boomed, and as they did, the state’s coffers bulged with stamp duty revenue.

Now prices have busted.  Every property-related statistic out of Ireland is gloomy.  With sales stopped dead, the government is receiving minimal revenue, yet it has obligated itself to provide high-quality local services throughout the country.  The party in power has miserable approval ratings and got walloped in the June local and European Parliament elections.  Should Ireland – might Ireland – could Ireland re-introduce recurring taxes on real property (as it was described by Chris Heady of the University of Kent)?  Is such a move good policy?  Is it political suicide?  If it is good policy, how can the government prevent political self-immolation?

I’m different and I don’t care who knows it

When I heard all this, I was agog, the more so because I learned about it via a request from the Irish Foundation for Fiscal Studies (FFS) to address their 24th annual gathering, The Fiscal Treatment of Property, on the subject of Lessons from the United States.

[Click here to access my whole presentation, in pdf.]

Now, gentle reader, you may think this an easy thing to rattle off, but I invite you to pause a moment.  You will have 45 minutes to explain the American property tax system to a nation that has not had one for thirty years, a nation whose area is roughly that of New England and whose population smaller than Massachusetts’. 

When everything is different, where do you start?

They asked me and yes I said yes I will Yes

What can you convey that may be useful in an utterly different context?

(By the way, in 1978 something occurred equally monumental to US real estate taxation.  I’ll let you ruminate for a while on what it was, and for extra credit, how it might have lessons for the Irish situation today.)

I started with the most basic point of difference – the triune government and its multiple ways of extracting taxes from the citizenry.  Have you ever counted them up?

Who’s got their hands in your pocket?

After I put this chart together – it’s a composite, an educated guess of the ranges – I was surprised that while the federal government gets the lion’s share, it’s local government that has the most diversity, with two guaranteed sources (real estate taxes and water/sewer) as well as the ability to levy other little pickups (and I didn’t list taxi-meter surcharges, soak-the-tourist hotel taxes, and speed cameras). 

I was also surprised that more than likely, you pay more in local taxes than you do in sales taxes.  Did you know that?  I didn’t.  I suppose it’s because the real estate tax bill is computed for you, whereas you have to do your own state taxes. 

Your mileage may vary because you may be in a high income-tax or sales tax state (like New York), and as a general rule, state taxes are high when real estate taxes are low, and vice versa.

[Any reader who has a chart of both, please email me the data or the URL; I'll be really interested. – Ed.]

How localities make ends meet

The reason is simple: localities that don’t get revenue-sharing from their state government have to make it up on their own.

Localities also like homeowners, preferably richer homeowners, preferably with fewer children, and it will surprise you to learn that the US lags more than ten points behind Ireland in homeownership: 68% to 79%.

Are higher numbers better?  Ownership percentages and mortgage debt relative to income

Not too surprisingly, when the homeownership rate is very high, so too is the relative level of mortgage indebtedness relative to income.

Yet the correlation’s not linear, with the US at 101%, Ireland 116%, Australia 120%, and Britain 130%.   Fortunately, debt is a balance sheet number, and payments are only a percentage of the debt, so that a ratio above 100% isn’t necessarily evidence of insolvency  Still, these are not statistics to be proud of.

They do mean that residential homeowners form the backbone of local tax revenues, including state tax revenues.

The importance of recurring taxes nationwide

While I confess surprise at the outliers of Illinois and Wisconsin, and the anomaly of Texas, overall the nation shows a pattern, with highest tax rates in the Northeast, lowest in the Confederacy (Georgia and Florida get a boost because these states have been urbanizing and gentrifying.

One state defies the trend: California.

Why’s California so light?

Any guesses why, readers?

As this was only of secondary importance to my Irish audience, I went back to the basic real estate tax budget algebra:

Seen in a blog post near you!

Real estate taxes: basic budget algebra

Having explicated this at length previously, I won’t rehearse it here.  The main point I wanted this audience to grasp is that taxation can be calibrated by millage rate, and sounds not too expensive: so many dollars per thousand. 

Further, when there’s a hole in the budget, you can plug it by fiddling the millage rate:

– Budget hole gets bigger? Raise the millage rate

– Real estate values drop? Raise the millage rate

– Got asset values you want to favor? Change their fractional assessment

You can also discriminate against some asset classes by discriminating in favor of others.

Tax ‘em too much and they revolt

But you have to be careful, or the taxpayers will revolt.  And that, I pointed out, is a dangerous backlash:

No taxation without representation!

Our first tax revolt came in 1773 and was a flashpoint in our eventual revolution and independence from Britain, on the memorable and valid slogan, “no taxation without representation.”  At the same time, in 1978, the citizens of another great republic expressed their revolt over too-high taxes by passing a statutory cap, Proposition 13, which single-handedly blocked the growth of California’s real estate taxes as a source of state and municipal revenue.

Personally, and from the safe distance of 3,000 miles, I think Proposition 13 one of the worst solutions ever forced on a government – a neck tourniquet for growth.  No matter how profligate California’s state and local governments were – and I am fully prepared to believe they were and are, particularly in light of recent events – blocking one revenue source is like damming one bank of a river, it just shunts the flow in another direction.  Worse for California, by giving non-movers a tax break relative to movers, it gradually develops into an embedded implicit subsidy of the elderly at the expense of the younger, more economically mobile and vital.  It’s torqued the state’s growth, shoved taxation toward more growth-inhibiting forms (like sales tax), and not stopped the bloating of government. 

[In Massachusetts, we have a similar real estate tax cap, Proposition 2½, the brainchild of Citizens for Limited Taxation.  Superficially similar, Prop 2½ is very different because its cap is higher, it's self-adjusting being tied to annual revaluations rather than progressively worse by virtue of being revalued only on transfer, and it allows for safety-valve overrides.  I've posted before about Prop 2½ and will likely return to it sometime soon. – Ed.]

Sounding the same note for thirty-plus years: Barbara Anderson

Take a lesson, I suggested to the Irish audience.  When you don’t tax owned property fairly on a continuous and recurring basis, and instead you rely on transactions to drive revenues (which Proposition 13 did because of revaluation and Ireland currently does with stamp duty), then you give the illusion of low taxes without local accountability.

In fact, that was my recurring theme to the Irish: You can get the populace to accept annual real estate taxes if and only if you tie them to locally autonomous control over visible local services like schools, police, and firefighters.

Indeed, it might be said that strong local real estate taxation is the means by which local government can and must grow, taking power away from an overly centralized national government.

Or their local governments

[Continued tomorrow in Part 2.]

Send post as PDF to