CA: Caveat on governor's budget plan - Experts say funding depends on strong real estate market

Sacramento -- After touting his budget plan to increase funding for education and transportation, the governor sounded a cautionary note.

"It's important to remember, however, that our great good fortune is the result of a strong economy and a surging stock market. And anybody who follows the Dow, and particularly the Nasdaq, realizes how volatile these sources of funds are."

The governor was not Arnold Schwarzenegger, but Gray Davis as he released his budget six years ago when state coffers were brimming with $12.3 billion in extra cash. But the money -- based on such volatile revenue sources as capital gains on stocks -- dried up almost as fast as it appeared, leaving the state with a whopping deficit that it's still trying to dig its way out of.

The state's good economic fortune is a result of a mix of job growth -- especially in the Bay Area -- and construction of new houses, according to the governor's budget, which predicts a 6 percent increase in personal income tax revenue in 2006.

The robust economy has been driven by "real estate, real estate and real estate," said Christopher Thornberg, a senior economist at the UCLA Anderson Forecast. He said that market is already starting to cool.

snip ... "There doesn't seem to be any contingency planning. There's no downside slack in this budget."

Schwarzenegger's budget for 2006-2007 spends $6.4 billion more than the state will take in during the fiscal year, using extra revenues from previous years to increase spending on education, transportation and prisons. The danger is that a lot of the money is spent on continuing programs, and there is no guarantee the state will continue to find itself with extra money, Silva said.

Silva described the state's revenue sources as a three-legged stool: property, sales and income taxes. Proposition 13, which limited the growth of property taxes in the state, means there isn't much adjustment that can be made. "Property tax is the lightest," Silva said. "We haven't been looking at those three pieces to see if there should be a rebalance."

Property taxes do rise. They do increase geometrically with the housing boom. Each year that the median house value in California rises 10% so do property taxes. This argument, in and of itself, is a red herring released by the governing elite and the leberal press to create a perception that increased taxes and/or a "rebalance" in Prop 13 limitations is warranted and justified.

Government's enemy is not Prop 13, it's the boomers. They purchase and don't sell. Their estates typically keep these low tax residences in the family and thwart the tax collectors. Look for the first "raid" on the tax code that flowed from Prop 13 to be the witdrawal of exemptions for family transferes.

Parent-Child Change in Ownership Exclusions

By applying for this exclusion, property owners may be able to avoid property tax increases when acquiring property from their parents or children.

In the State of California, real property is reassessed at market value if it is sold or transferred and property taxes can sometimes increase dramatically as a result. However, if the sale or transfer is between parents and their children, the property will not be reassessed if certain conditions are met and the proper application is filed.

My attorney filed the Prop. 62 exemption for my parents' home. As a result, I don't expect to see an increase in the property taxes I have to pay as the sole heir now that they've passed on. So as long as I don't sell my home, I benefit from a low property tax.

(Denny Crane: "I Don't Want To Socialize With A Pinko Liberal Democrat Commie. Say What You Like About Republicans. We Stick To Our Convictions. Even When We Know We're Dead Wrong.")

I don't see how the price of homes can continue to climb out there.

The prices will plateau because of lender greed. Lenders are already approving loans at 50% of disposable monthly income and to multiple families occupying the same residence.

When prices hiccup, even ordinary rates of default will result in sales at less than prevailing market, acting as a natural buffer, resisting the inflation created by an unmet demand. Lending will suddenly become conservative to stem the widespread portfolio losses and the qualified demand will subside further.

Residental construction will slow leading to further defaults by the working class. The industry will claim a disaster but will resume when memories fade with time. The cycle will renew.

More desireable locations along the coast will plateau and the less desirable interior local will bust. The costal upper class will see their investments salavaged and the less well healed, social climbers, grasping for the brass ring in the more affordale interior will be wiped out.

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