Speculation

In my previous article on agriculture I wrote a bit on one issue that really irritates me about the way real estate is handled in this country: the formulation of assessments on property based on its speculative value as opposed to its intrinsic or objective value. For example, a piece of property is assessed not based on what characteristics it actually possesses (presence of timber, pond or stream, soil content, etc.), but on such factors as whether it is adjacent to a retail area and could be developed, whether it is in a rich neighborhood, whether it is part of a development “corridor”; in short, for a variety of factors that do not exist – what the property could become if developed.

Rather than go into a lot of hypothesizing about how (and if) this problem can be solved, I thought I’d share two real life situations where people got shafted because of this set-up.

My wife’s family knew a man who lived in the city of Troy, Michigan, a suburb of Detroit. In the 1950’s, Troy was a relatively small town surrounded by farms of varying sizes. The man in question, a GM employee, bought a small farm in Troy during the 50’s and settled down there with his wife. As he was a GM employee, he never took up farming full time; nevertheless he did a considerable amount of husbandry on the side and considered himself a farmer.

Over the years, as his children moved on, the man retired from GM and his wife passed away; meanwhile Troy grew and became somewhat of a small metropolis. In the 90’s it established itself as a technology center, a Silicon Valley of the Great Lakes. Huge IT firms moved to Troy and the city became dotted with skyscrapers. All of the man’s farmer-neighbors made small fortunes selling out their acreage to big-time developers. Yet the man himself did not want to sell out; his attitude was that he had invested half a century on this farm, had raised his family there and intended to stay and die there if possible. Meanwhile, the city continued to sprout up around him.

Gradually it got to the point where (literally) there were skyscrapers on both sides of his property. Development companies offered him lucrative sums to sell out, but he refused. The City of Troy tried to pressure him as well, but to no avail. In the end the man lost his struggle to keep his property, not by being bought out or forced out by trumped up eminent domain laws, but simply because the city kept reassessing his property value higher and higher, with correspondingly higher taxes, until he could no longer afford to live there. In the late 1990’s he was forced to leave; his property was gobbled up by developers and became a parking lot.

All throughout this ordeal the property was being valued not by what it actually possessed but by a speculative value of what it could be. As Troy grew, the city looked at the man’s farm and said, “This could be a parking lot, off-ramp, office building, etc.” and began to tax the property as if those things already existed on them. Meanwhile the man simply wanted to live out his dying days on his own property and was unable to do this because of the speculative nature of property valuation.

Case two. Several years ago, during the height of the property bubble, my wife and I were looking for our first house. After much looking, I found the perfect place: a three bedroom bungalow on three acres. The property was shaded around the house, but it had a field and barn out back, the perfect type of thing for starting a small farm. It was surrounded by other farms and fields round about and was far enough outside of town to have a country feel but close enough to town to get there in about ten minutes or less. The house had been vacant for some time and was somewhat dilapidated, though a few thousand dollars could have made it very nice. I figured, based on the market around my town that the house should have been between $130,000 and $150,000 at the time. My wife and I decided to inquire about it.

Imagine my dismay when I saw the house and property were being listed for $500,000. I was so stunned that I even asked the realtor on the phone if she hadn’t accidentally added an extra zero to the price. The realtor laughed and said that the reason for the high price was because it was two miles away from a busy interchange and was considered part of a “corridor” of future development; i.e., the township expected that in the coming years this land would become a prime retail development site and was setting the price accordingly, hoping to rake in huge profits. My wife and I laughed and said, “They’ll never get half a million for this.”

Of course, a few years later the real estate bubble burst and property values plunged, especially in Michigan, which was already crippled by the fall of the Big Three. Nobody ever did buy the property in that “corridor.” It’s still sitting there five years later, except now the house is seriously dilapidated beyond repair (roof caved in, broken windows, etc.); in order to make some money off of it, the owners sold all the timber, so the yard is dotted with ugly stumps and the yard is all tore up and mucky from the big machinery they brought in to move out the timber. The whole place is a wreck. I still see this property every time I leave town on the main road. The owners would be happy to take $150,000 for it now. But of course, nobody wants to pay to tear down an existing house and build a new one when there are so many cheap foreclosures on the market. So the house rots.

What do I draw from these two real-life scenarios? In the first case, the man who wanted to keep his farm, it is terrible that a municipality can effectively bully a property owner out of their land by raising taxes based on the property’s speculative value. Even if it is not possible to eliminate market value speculation entirely from property assessments, it seems that a person’s tax rate should at least be locked in at the time of their purchase. So long as the man lived on the small farm, he should have paid taxes on the value of the property as a small farm, not be forced to pay ever increasing taxes on the land’s value as a potential parking lot, sky scraper, etc. If the taxes need to be reevaluated, it should only be done at the time the property is transferred, not every year and certainly not based on what the city deems to speculative value of the property to be worth.

In the second scenario there is really nothing to point out except the sad case of a buyer willing to purchase a house for what it was objectively worth but being turned away – meanwhile, the house rots and nobody gets it. I’m not saying they should have been forced to sell to me or that people don’t have a right to ask what they want; I merely point that it was a really sorry situation that occurred because people made decisions based not on what the land actually contained but on a speculative frenzy that turned out to be a cataclysmic bubble.

So long as we believe that a man should be able to ask whatever he wants for his property, I don’t think there is any way to really get rid of speculation in the long run, at least when it comes to asking price/sales price. But when it comes to taxation, municipalities should tax only for really existing assets and not imaginary ones. None of you would stand for it if your city taxed you because you could build a second story to your house if you hadn’t actually done it. Taxing people for non-existing realities is immoral.

@ Photograph by Khantipol

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About Phillip Campbell

Phillip Campbell is an educator and Youth Director in Southeast Michigan, a graduate of Ave Maria University and Madonna University with a degree in history and a license in secondary education. He is a husband and the proud father of four children. He is the author of the fantasy-epic Tale of Manaeth and runs the popular Catholic blog Unam Sanctam Catholicam.