Market lower

The Dow dipped below 12,000 this afternoon before rebounding a bit:

NEW YORK – Stocks fell Wednesday, pulling the Dow Jones industrials through the psychological 12,000 barrier for the first time since Nov. 6 as concerns about faltering subprime mortgage lenders extended a broad selloff in stocks.

The Dow first crossed the 12,000 mark in October.

The market showed its continuing nervousness about soured loans among subprime lenders. H&R Block Inc. added to the uneasiness by announcing after the closing bell Tuesday its fiscal third-quarter losses would rise because of a $29 million writedown at its mortgage arm.

The anxiety over mortgage lenders, particularly the subprime lenders that make loans to people with poor credit, pushed the Dow down by more than 240 points Tuesday, its second-biggest drop in nearly four years. The pullback resembled a 416-point drop in the Dow seen two weeks ago that began in part after a nearly 9 percent drop in stocks in Shanghai and amid concerns about subprime mortgages.

David Altig says that the problem is just in the subprime loans, it’s in the adjustable rate mortages (lots of graphs and charts). Calculated Risk, who’s been on top of the housing bubble story for some time now, has a graphic of how defaults in subprime loans affect the entire housing market. Steve Verdon links to a couple of articles and notes the problems that a decline in the housing market could pose to the entire economy.

Looks like a good time for me to trot out the observation I’ve been making for some time now. State, county, and city governments are highly dependent on real estate taxes and sales taxes for revenue. Some of them have become accustomed to increases in assessed valuation as a politically cheap way of increasing taxes, enabling them to increase spending. Money-back refinancing and home equity loans have tended to bolseter retail sales.

As the real estate market stalls, I think it’s pretty likely that state, county, and city tax revenues will slow, too. Historically, these governments have preferred to raise marginal tax rates rather than cut spending. Increased marginal real estate tax rates can spur foreclosures, too. That’s what happened in the Depression of the 1930’s.

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  • You’re exactly right. I own a house in Florida and it’s current assessed value for tax purposes is about 1/2 of its market value. Existing law limits how much taxable value can be raised each year. However, a new law passed a couple of years ago now makes the taxable value equal to the value the house sold for, or the market value (whichever is higher), when a property is sold. During the housing boom that ended in Florida in the summer of 2005, local governments were raking in the cash, but the market has depressed considerably and I’m sure (though I don’t have the figures) that at least the growth of tax income has decreased considerably.

    Ironically, that change in the tax law actually helped to depress the market as buyers who moved locally could pay up to 5 times their current tax bill when moving.

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