The next real estate bubble

As Assemblywoman Sharron Angle was gearing up for her first attempt at a Prop-13-style ballot initiative in early 2005, the fear coursing through Nevada's government establishment was palpable.

Within one year, median home prices in Clark County had jumped over 45 percent. In Washoe County, the prices had risen 34 percent. As the resulting property taxes soared, many Nevadans increasingly feared being priced out of their homes.

So state and local government officials – frightened that Angle's solution might gain traction – turned, as they often do in their time of perceived need, to Guy Hobbs, the former Clark County finance director and co-founder of the nominally private-sector firm, Hobbs, Ong & Associates. Since its launch 12 years ago, the company has worked primarily for Nevada governments and their agencies, performing consulting services and other gun-for-hire tasks.

Consequently, lobbyists for state and local government were soon roaming the halls of the Nevada Legislature, armed with a slickly produced four-color study. In it, author Hobbs presented multiple arguments against any Proposition-13-style approach to property tax reform.

Perhaps the most prominent line of attack – repeated throughout the white paper – was the assertion that the situation facing Nevada homeowners in 2005 was merely a temporary "aberration" not requiring any substantive fix.

"We are not dealing with a fundamental flaw within our system of assessment and taxation," wrote Hobbs. "For this reason, consideration of methods that would radically overhaul Nevada's system – such as implementation of a California-style tax limitation system – would appear to be well beyond the scope of solving the problem at hand."

Interestingly, Hobbs' white paper candidly admitted that it did "not include an exploration of the causes of the increases in property values" even though such a "very worthy topic" could "lead one toward a more properly targeted solution." Clarity on why property values were soaring could help answer, the consultant wrote, "whether we are dealing with a short-term aberration or a longer-term systemic problem."

Despite the crucial nature of the question, however, Hobbs proceeded to simply dismiss it: "Suffice it to say that the recent, rapid increase in property values is widely believed to be a market aberration."

But does it suffice? The widespread consensus in America's financial centers today is that our nation's runaway real estate bubble is the direct result of the U.S. Federal Reserve's profligacy – i.e., its prolonged and heavy pedal-to-the-metal foot on the central bank's monetary accelerator.

Real estate, after all, is mostly purchased with borrowed money. When interest rates are pushed down, money can more easily be borrowed. And prices for real estate, other things equal, are bid up.

Between 2001 and 2004, the Fed increased the money supply by a whopping 25 percent, artificially driving interest rates far below their natural level.

The Fed did this because it was seeking to avoid the naturally recessionary consequences of its previous binge of "injecting liquidity," the bursting of the so-called tech bubble of the late 1990s and 2000. That bubble, in its turn, had been the fruit of the previous dozen years of activity by the Federal Reserve, in which Chairman Alan Greenspan had responded to virtually every financial-market sniffle with the same knee-jerk nostrum: inject liquidity.

The current Fed chairman, Ben Bernanke, is continuing this same folly today. He is attempting – like Greenspan – to avoid the recessionary consequences of previous money-printing binges by simply printing ever more money, to mindlessly drive interest rates down, for the moment, again.

In other words, not only do all Americans face the prospect of the Fed's continuing assault on saving, but they also face the growing likelihood of future real estate bubbles, at intermittent intervals, with the concomitant frightful spiking of their real estate taxes.

Nevada's property tax problem, therefore, is clearly systemic, and no short-term aberration. In 1978 California voters recognized the same situation in their state and passed Proposition 13. Nevada voters that fall were thinking the same way when, by a better than 3-to-1 margin, they passed the first leg of a similar measure, Proposition 6.

The desire of the state and local governments that so fiercely oppose Prop-13-style solutions is to continue receiving the windfall property tax revenues they reap from these recurring real estate bubbles.

Yet those windfalls are in essence predatory. Here in Nevada, they are unjustly wrung out of property owners by the state's system of assessment and taxation.

Hobbs, Ong & Associates to the contrary, to most fair-minded people that kind of injustice built into a system would definitely count as a "fundamental flaw."

Steven Miller is vice president for policy at the Nevada Policy Research Institute.