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California Dreamin’: Voters’ Decision Could Free Up More Homes for Sale

A California ballot initiative, if approved by voters in November, could add a swell of homes to the Golden State’s ridiculously tight housing market.

The Property Tax Fairness Initiative would make it much more affordable for homeowners who are aged 55 and older, disabled, or in natural disaster–ravaged communities to sell their current home and buy a new one within the state without being hit by crushingly higher property taxes. This could encourage older sellers to put their family homes on the market, easing the increasingly severe housing crisis, say real estate professionals.

The California Association of Realtors®, which is spearheading the initiative, collected nearly 1 million signatures to ensure that the proposal makes the Nov. 6 ballot. The signatures were submitted earlier this week, guaranteeing it a spot on ballot. (A similar bill was introduced by State Assemblyman Marc Steinorth in January, but has yet to come up for a vote.)

“We have hundreds of thousands of senior homeowners who have lived in their homes for many, many years who have enjoyed a lower tax base,” says Steve White, president of the California Association of Realtors. “But at a time when they need to downsize, retire, or move closer to their families, they’re essentially trapped in their homes” if they don’t want to face higher tax bills.

This initiative “would free up a lot of homes for sale, largely family homes,” he says. “That’s what our buyers in California need.”

The state’s Legislative Analyst’s Office says the initiative could open the door for tens of thousands of homes to hit the market annually—although local governments would also lose out on tax revenue.

While a lack of homes for sale has driven up prices in real estate markets nationwide, the problem is acute in California because of Proposition 13, the 1978 voter-initiated law that freezes property values at their last sold price and caps annual property tax increases at 2%.

Proposition 13 has been a boon to longtime homeowners in the many California towns where prices have appreciated dramatically. However, the downside is that if they sell, they often can’t afford to buy another home at today’s prices. (When a home is sold, it is reassessed for tax purposes at 1% of its sale price, which then becomes the new owner’s base rate.)

But if voters approve the initiative, moving to cheaper parts of the state could become much more affordable. If they buy a home for the same price or less than the sold price of their old home, they would pay roughly the same percentage of property taxes. If they buy a more expensive home, the assessment will be the difference between the price at which they sold the old home and the price they paid for the new one added to the tax base of their previous home.

(Currently, sellers can keep their rates low only if they move within the same county or between 11 of the state’s 58 counties.)

“It becomes an incredible advantage,” says Patrick Carlisle, chief marketing analyst at San Francisco–based Paragon Real Estate, of the initiative. He points out that someone who bought a home in San Francisco in 2009 would be paying half the property taxes as someone who buys a similar house today.

But he doesn’t think a measure like this could lead to an influx of more affordable homes hitting the market.

“People who are in their 50s and their 60s who are downsizing don’t [typically] live in starter homes,” Carlisle says. They’re more likely to live in family homes of three to five bedrooms. Still, he says, “every little bit helps.”

The downside to lower taxes

Unfortunately, a smaller tax base for some means fewer services for others; the state’s Legislative Analyst’s Office calculates that schools and local governments stand to lose billions of dollars each year in property taxes if the initiative passes.

Local governments “don’t want someone from San Francisco, who is wealthy, coming in and buying a big house,” says Carlisle. “They would keep their low property tax bill to the disadvantage of the new county.”

It could also lead to rising prices in the places where sellers from wealthier areas of the state are settling in as they compete for properties, he says. That could price some locals out of the market.

“It appears to have a lot more to do with increasing the number of real estate commissions than addressing California’s housing crisis,” says Chris Hoene, executive director of the nonpartisan California Budget & Policy Center, which analyzes state policy issues. And homeowners “never have to pay [their] fair share of [their] taxes.”

In exchange for the tax cut, he believes the number of homes to hit the market would be only a drop in the bucket compared with what’s needed.

“It’s deeply ironic that the [original] initiative [Proposition 13] was initially focused on keeping seniors in their homes,” Hoene says. “And now, 40 years later, we’re saying that’s a problem and we need to provide them an incentive to move.”

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