Durham's real estate transfer tax: A modest proposal

The debate continues on the proposed real estate transfer tax for Durham; the Herald-Sun and the N&O both have good coverage, and Michael and Barry have both shared some of their views on their blogs and this one. Thanks too for all the comments coming in on the topic and the shared perspectives.

As I've learned more about the transfer tax, I'll be the first to admit that there are some good points that opponents have raised. For instance, Ken Gasch -- one of the real neighborhood heroes in Durham, and a Realtor to boot -- has pointed out its impact on people who want to revitalize (renovate/flip) older houses in urban neighborhoods. Fair enough. And others have noted concern for senior citizens... reasonable, though I'd note the impact here would be less than for either sales tax or property tax increases.

All that said, I still have a real problem with the traditional argument put forward by Realtors, apparently even as recently as last night: to wit, that transfer taxes rob homeowners of the equity in their property, and discourage first-time home buyers.

This is a very poorly chosen argument for the real estate lobby to make, even a dangerous one. Because it opens the door for one to argue that the real fault, dear real estate agents, lies not in the taxes, but in thy own selves.

For years, real estate agents have traditionally charged a commission of 6% on the sale of any real property. This commission is split between the seller's agent and buyer's agent, if any. Note, of course, that this is a figure ten times larger than the transfer tax -- but I digress.

In recent years, of course, discount and online brokerages have come back with lower commission rates, or buyer rebates intended to shake loose some of this cash. And the National Association of Realtors has fought back in kind, suing or threatening to sue some discount brokers, or trying to cut off their access to the MLS, the Holy Grail of property sales.

So let's just take the base case of a Realtor charging 6% as a selling agent, and keeping that flat over the years. This number craftily hides an intriguing fact -- though the rate has remained nominally the same for years, as property values have increased faster than inflation since the 1992 recession, the real value of the commission has soared over the same period.

Let's look back at 1996, when the median home price in Durham was a mere $120,000. A Realtor working at the margin would have earned a $7,200 commission selling a median-priced home in the market. Fast-forward to 2005, and a median price of just over $160,000.  That same 6% commission would equate to $9,600. A growth that outstrips inflation, mind you, since compared to retail price inflation, $7,200 in 1996 dollars represents just about $8,950 in 2005 dollars.

What does that extra $650 represent? As it happens, 0.41% of the 1996 selling price of the home. Or, just about the exact amount of the proposed transfer tax increase. If this amount is so harmful to first time homebuyers, or to the equity gains of long-time homebuyers, why isn't the 'standard 6%' being dropped by real estate agents?

And Durham is about the worst-case scenario for checking these data for a transfer tax supporter, given that home price appreciation has been slower in the Bull City than in the rest of the Triangle. Let's look at appreciation in Cary, where the median value of a home rose (measured in real 2000 dollars) from $143,350 in 1990 to $196,700 in 2000. A 37% increase in real, inflation-adjusted values -- a 37% increase in inflation-adjusted Realtor earnings.

All of which (in the Swiftian fashion I've adopted for this little piece) points to the rising inflation-adjusted commissions -- not the transfer tax -- as the biggest risk to home equity.

What should we besotted homeowners do? One could imagine a campaign of homeowners refusing to pay 6% commissions, for a start. As noted above, many are already... but old traditions die hard.

Perhaps we should stand with the Realtors, and be deeply worried about the cost of homeownership with them -- and offer 5%, or less, to our broker the next time we sell a house? Will our real estate brethren stand with us in helping keep homeownership affordable to first-time buyers, and young familes... the folks they feature at the It's A Bad Idea website?

I do wonder.

Comments

[Glenn Wallace]

Speaking as a CPA and as a realtor, I applaud your recent post.

This transfer tax is a necessary evil.

The realtor lobby is short sited on this issue - protect commissions under the guise of protecting the public from taxes. What they forget to point out is that Durham's infrastructure and schools are crumbling before our eyes.

Money to right the boat has to come from somewhere. Failing to fund improvements will have a worse effect on real estate sales in Durham in the future.

The only valid argument I feel the realtor lobby has is the issue of improper spending of the taxes raised, but that is a different debate.

Glenn Wallace
919-614-3684

[barry]

Glenn - commissioners last night indicated that revenues for either tax, if enacted, could be explicitly limited to servicing the debt on the school bonds.

[Bull City Rising]

Glenn -- Thanks for your comment and for visiting the site. We've never met, but I remembered after your comment hearing the episode of WUNC's The State of Things that featured a discussion on discount brokerages, including a debate of sorts between you and an executive from the N.C. Association of Realtors. (WUNC fans will remember this from the pre-Frank Stasio days at SOT.)

Folks interested in hearing the program and learning more on the topic should check out http://www.ibiblio.org/wunc_archives/sot/audioarchive/sot0518.mp3

[Toastie]

Nice analysis, Kevin. Your posts needs to find its way to one Randal Haithcock.

From the N&O:
Resident Randal Haithcock said he supported the land transfer tax because those who wouldn't be able to afford to sell their homes because of any tax increase could simply avoid the issue by staying put.

This comment makes absolutely no sense to me; it's kind of a backwards argument in favor of the transfer tax by making the same arguments as the Realtors. It seems very simple to me that anyone who suddenly feels unable to buy, sell, rehab, flip, or otherwise conduct a real estate transaction in Durham with a heftier transfer tax simply needs to shop around more for a real estate agent who will accept a lower commission.

It sounds to me, no offense to Ellen Dagenhart or Leslie Page, who seem to work hard to promote investment in Durham, that the only casualty of a higher transfer tax will be their bottom lines.

I didn't see anyone from discount brokerages like My Dog Tess at the hearing last night fighting against the transfer tax.

[KeepDurhamDifferent!]

If by "investement" you mean higher taxes and public spending, then yes Ellen D. works very hard in this regard. While she and I have had our disagreements regarding the food tax and the public subsidy of Preservation Durham (which I believe is a conflict of interest), it must be said that she has been a force for good in this town.

[John Beck Tax Foreclosure]

Well it protect commissions under the guise of protecting the public from taxes. What they forget to point out is that Durham's infrastructure and schools are crumbling before our eyes.

[asbestos removal]

Real estate transfer tax is a tax that may be imposed by states, counties, or municipalities on the privilege of transferring real property within the jurisdiction. Total transfer taxes range from very small (for example, .01% in Colorado) to relatively large(2.2% in the District of Columbia).

[Chris C.]

Real estate transfer tax is just another tax the state has come up with to get more money from people.

[Todd P]

That last post looks like spam.

I sure wish Durham County would put this to a vote. This is a tax - paid only at the sale of property - that we could all live with.

This is a far more progressive option than the sales tax.