As most of you are aware, our country has been living beyond its means for several decades now, racking up debt at a feverish pace. By 2024, the accumulated net debt of households ($19 trillion), corporations ($12 trillion) and government departments – whether at the municipal ($4.1 trillion), state and local ($3.5 trillion) or Federal ($38 trillion) level – topped $80 trillion. That’s 2 ½ times our nation’s annual income, or $600,000 per household. Since the (mathematically) average household is not typical, it’s more pertinent to compare the figure to the median household income of $83,700 in 2024. That aggregated debt estimate does not include prospective pension and medical obligations: Social Security, Medicare, Medicaid, as well as unfunded state, local and municipal benefits. Altogether, these double or triple our outstanding debt tally.
Each party’s debt (except for unfunded pension and health benefits, which are really just empty promises) is another party’s asset. Foreigner investors have been big buyers of US bonds, but still hold only 10% of the total outstanding. That means we mostly owe money to each another. That might sound like a good thing but, unfortunately, the distribution of assets vs. liabilities in this country is highly skewed. A large number of households hold the lion’s share of the debt (including future liabilities imputed to them as taxpayers) whereas a relatively small share of households hold most of the assets. In order for those holding assets to redeem them (i.e., to spend some of their accumulated savings) those holding the debts must be able to repay them…
This has always been true and the ownership imbalance has been slowly getting worse over decades, so what has changed? Two things. First, the baby boomers have been retiring in large numbers. As their incomes and savings diminished, their asset purchases (desire to hold other parties’ debts) have slowed. Now, they are drawing down accumulated savings in order to meet their retirement spending needs. Second, many foreign investors, seeing how un-creditworthy America has become, have gone on a buyers’ strike. For decades, US Treasury bonds, high-quality corporate bonds, and government-guaranteed securities were the primary reserve assets held by foreign central banks and private investors. No longer. Other investments, including gold, have taken precedence. This trend accelerated after 2022, when NATO seized some $400 billion in US dollar-denominated assets held overseas by the Russian government. This prompted the so-called BRICs (Brazil, Russia, India, China and allied countries) to diversify away from US$ bonds.
As the demand for US government and corporate bonds has diminished, interest rates have risen so as to entice new buyers into the market; that’s necessary to maintain balance amid an ever-rising supply of debt. The resulting increase in borrowers’ interest expense has necessitated the issuance of still more bonds…leading to a vicious circle of rising rates and spiraling indebtedness. Once it becomes clear to everyone that the Ponzi scheme has run out of optimists and fools, it comes to an end. That, in technical terms, is known as the shit hitting the fan. And here we are.
Even when the ownership of assets and liabilities is matched, rapidly rising indebtedness is dangerous. Inflating asset prices make people feel wealthy and inclined to spend more. They may borrow money to purchase stocks (or Bitcoin), take out a second mortgage to pay for college for their kids, or refinance their home to “cash out” some of their equity. They reckon that the bill(s) can always be paid later by selling some of their newfound wealth.
Households are by no means unique in their financial recklessness, as the debt figures attest. Corporations that borrow money to buy back their stock, boosting CEO compensation while deferring their employees’ pension obligations, is another example. Municipalities that issue bonds to pay for new sports facilities and tax breaks for franchises – backed by taxpayer money, rather than revenue from ticket sales – is another. Such decisions leave borrowers vulnerable to a decline in asset prices, as Japan learned from the three decades (1990-2020) it lost after the real estate and stock market crashes of 1989. And who can forget the millions of Americans who lost their homes to foreclosure in 2009-2010, when the supposedly impossible – a national housing market decline – materialized.
What does any of this have to do with property taxes? It is my contention that we are engaged in a massive game of musical chairs, sometimes known as bait-and-switch, pass-the-buck, or find-the-bag-holder. Predatory actors understand how to play the debt game to their advantage. In the first years of this century, mortgage originators identified households in lower-income zip codes who were close to paying off their loans. They persuaded these and other borrowers to re-leverage their homes (by extending the terms, doing cash-out refinancings, and/or switching from fixed to variable rates) in a way that made it difficult to stay in their homes under more challenging economic circumstances (see House of Debt by Atif Mian and Amir Sufi). This time-honored strategy for consolidation of ownership was described in an international context by John Perkins in his 2004 classic, Confessions of an Economic Hit Man. Step 1: Encourage excess borrowing by inflating people’s perceptions of future income or asset appreciation. Step 2: Wait for (or trigger) an economic downturn, which drives bankruptcy through job loss, creating a spiral of recession, foreclosure and asset price declines. Step 3: Swoop in to buy up depreciated assets for cents on the dollar – ideally with the benefit of government guarantees or taxpayer-funded bailouts in order to “stabilize markets.” Rinse and repeat, over decades and centuries, across geographies and cultures. It is a very old story.
The consolidation of personal data and algorithms to analyze it confers additional advantages to the would-be vulture capitalist. For example, a software tool known as YieldStar has been used by RealPage to help landlords collude in setting rents to maximize their total income. “It’s just the market” they argue, even as they set rents above the level that would clear vacancies (landlords profit by keeping rents high for all tenants, even if doing so means leaving some units empty). Vendors use similar algorithms to achieve “price discrimination” – profiling customers to determine the maximum price they are able or willing to pay for what they want. Instacart was recently busted for using its subsidiary Eversight to implement “dynamic pricing” of groceries, resulting double-digit price discrepancies for shoppers purchasing the same items, at the same time, from the same location.
Tenants and consumers may have it rough, but homeowners are the ideal bag-holders, because it’s difficult for them to move or switch. People are deeply, financially and emotionally, invested in their homes. James Altucher describes home ownership as the first of the 10 Commandments of American Religion. And yet, as Jim Collins explains, a home may be “one of the worst investments a person can make.” We spend thousands of dollars improving and maintaining our depreciating assets, and hours repairing, decorating and landscaping our abodes. We are anchored by these investments, as by our jobs and professions, our children’s schools, local friends and relatives – a million things that keep us in place and unwilling to move. We scrimp and save to pay off our mortgages, in anticipation of the day we finally own our castles outright. Then we won’t have to worry that a job loss, medical event or some other unfortunate incident might force us out of our home.
Property taxes are sometimes described as a levy on unrealized capital gains, but that’s not quite correct. For one thing, the owner’s cost basis (their home’s purchase price, adjusted by the cost of maintenance and improvements made since that time) is not deducted from assessed value. On the contrary, investments in their home – even those that benefit their neighborhood and town – increase their tax liability. Second, recent home sales, even if a comparable property can be identified, do not represent the “market.” That’s because all residents are taxed simultaneously at the price of the marginal buyer. If any number of them tried to cover their tax liability via a sale of their property, the “market” would quickly re-price to a lower level. The smaller the town and more unique or valuable the properties, the sooner that would occur. That’s why assessed values are typically lower – and often considerably below – current market prices. Unfortunately, that no longer appears to be true, at least not in our town.
How did houses become so expensive? A big driver is the Federal Reserve’s expansionary monetary policy, which has driven up the prices of all assets (stocks, bonds, commodities, land and houses) in what has been described as an “Everything Bubble.” Unlike most other assets, real estate is taxed before it is sold, validating the “unrealized” description of a property’s value. Whether these taxes are fair (or even viable) depends on whether a property’s assessed value is proportional to the homeowner’s income and net worth. Most young people, older people, and those without significant wealth – or those carrying a lot of debt – are either unable to own a home, or are at risk of losing it. Even when the mortgage is paid off, if one cannot afford to pay these taxes out of income, the only options are to: sell the property, take on new debt, or get into a reverse mortgage. Each of these equity-stripping operations diminishes the homeowner’s financial security, and whatever financial legacy they might leave to their children.
Guess what? These macro trends and policy decisions are almost entirely out of the hands of the homeowner.
To be continued –
