WASHINGTON - Record low single-family housing starts in most parts of the country will not add to the tax revenue woes troubling state and local governments for at least a year, but deteriorating finances for municipalities may require federal assistance, market participants said yesterday.
Housing starts for single-family homes tumbled 12.0% from 618,000 in August to 544,000 in September, the lowest ever on record, the Commerce Department reported Friday. Single-family housing starts fell to new lows in the Northeast, Midwest, and West, while starts in the South fell to the lowest level since January 1991. Total housing starts fell nationally well below the lowest of economists' estimates, according to data from Thomson Reuters.
Building permits, a measure of authorized construction, fell by 3.8% for single-family homes nationally and set record lows in the Midwest and West regions.
However, state and local governments typically do not see property taxes from a new home for about a year from when construction started, market participants said, insulating municipalities temporarily. As a result, while they are reeling from tight credit conditions now, they will have to prepare for a looming hit to property revenues.
States "are already looking with horror at where their anticipated revenues are going to come in this year," said John Craford, executive vice president of finance and administration for the Connecticut Housing Finance Authority.
"They're realizing already those shortfalls," he said, calling the government's lack of attention to state and local governments "inexcusable and outrageous."
Thus far, none of the purchase and lending programs proposed by the federal agencies include state and local governments.
States that rely heavily on sales taxes from new home sales and construction fees , specifically California and Arizona, will suffer disproportionately and more immediately, said David Wyss, senior economist with Standard & Poor's. Revenue for those states are effected directly and finances for both states "are already in a lot of trouble," Wyss said.
As home buying and selling slows, California and New York City may lose revenue from fees associated with turnovers, sources said. The step-up provision in California's Proposition 13 reassesses property taxes after a home has been sold, so fewer home sales mean lower revenues, Wyss said. New York is also concerned about losing revenue from real estate turnover, said Jim Glassman, senior economist with JP Morgan Chase & Co.
Property tax revenue in California and other states is cushioned from falling home prices because of the gap between a home's market value and its assessed value, sources said. In California, where home prices have fallen by 30%, according to one bond trader, the state has not been forced to reassess property values lower, but that could change if the home prices do not find a bottom.
State and local governments are facing increased budget pressures and are calling for help from federal agencies or Congress. Late last week, the chairman of a House subcommittee, as well as state and local groups, urged the Fed and Treasury to consider including muni issuers in the commercial paper and Troubled Asset Relief Programs. Governmental officials and lawmakers are also calling for Congress to consider a second stimulus package.
The Treasury could consider municipal debt to be troubled assets, and buy bonds through the TARP, Wyss said. While focused on buying mortgage-backed securities, the Treasury has discretion to buy any troubled assets.
The Fed could extend the Commercial Paper Funding Facility to include tax-exempt commercial paper and short-term municipal debt, other sources said. Fed intervention would benefit sectors of the muni market that are dysfunctional or inactive, a trader said. Single-family and multifamily housing bonds are "having very difficult time accessing the market," he said. "We can't wait much longer."
The House Ways and Means Committee has scheduled a hearing on economic stimulus proposals for Oct. 29.
Congress may take up a second stimulus package after the election. Senate Majority Leader Harry Reid, D-Nev., and House Speaker Nancy Pelosi, D-Calif., have called for Congress to take up a second stimulus package after the election. Reid has scheduled the Senate to return on Nov. 17, and he hinted on Wednesday that a stimulus package may include funding for infrastructure projects.