Foreclosure increase hikes state revenue

Some bad news might mean some good news for those trying to balance the state budget, which lawmakers are attempting to hammer out this week.

Despite a slump in the housing market, real estate transfer tax revenue has gone up. The reason, speculates economist Brian Gottlob in his economic newsletter Trend Lines, is the sharp rise in mortgage foreclosures.

This wave of foreclosures is not just due to an economic slowdown, but because many people got sucked into buying or mortgaging too much equity through sweet teaser interest rates and the loose lending practices of the subprime mortgage market. Now that interest rates have risen, and the equity in homes are falling, many of these homebuyers can’t refinance or sell and are faced with foreclosure.

Every time a foreclosed home changes hands, the buyer has to pay the state’s real estate transfer tax, and while the amount may be lower that that imposed on conventional sales, the sheer number of foreclosures could be enough to more than offset the slow housing market when it comes to state tax revenues.

Foreclosure sales numbered 1,100 in 2006, according to Gottlob — a 20th of all sales. Gottlob estimates that this increase has resulted in a 2 percent increase in transfer tax revenue. If the number of foreclosures continues to rise – as expected – “the short-term effect will be to provide an even larger boost to tax paid real estate sales.”

In the long term, however, the lag in housing prices and sales might damage government revenue in other ways, such as property tax revenue. Besides, said Gottlob, the boost in revenue “cannot compensate for the misery” caused by the foreclosures. – BOB SANDERS