Austin Real Estate Blog

So Austin is looking at a budget crisis. The city manager revealed we have a projected deficit for 2008. This might seem surprising considering that Austin has been experiencing alot of growth over the last few years, and you would think growth means more money. The increased population and real estate tax base did lead to increased revenues. The city had a little bit of glee about what to do with all the extra cash. And the city property tax on Austin real estate was even lowered a little. As I'll talk about a little later though, growth also means more costs to run the city. Apparently, someone made a big boo-boo, and by big, I mean a 27.5 million dollar, and by boo-boo, I mean boo city manager boo. I could see some random mojo making this naive mistake but...

This revelation that the city has a budget deficit might put more heat on the Austin city manager. She has already been in the hot seat when people started asking questions about Walmart. Most of the city council responded that they were unaware of the development, which was atypical since the council is usually on top of large scale real estate projects affecting the city. The first site plan somehow flew under the radar at the city. When later it was discovered that the city manager's husband is paid by Walmart, it didn't make anyone feel better about the situation. Now with the deficit, there might be some questions about how the city manager was off this much. To add fuel to the fire, she recieved a pay raise bringing her pay to 240k 2 weeks before announcing the 27.5 million dollar deficit. She also recieved a increase in pension so that if she were to retire today she would recieve an extra 12,355 a year.

So moving on what happened to all the money. The city did see a huge increase in revenue due to growth, as seen above. But alot of that money got sucked away to pay for the increased population size. For instance, Austin expected to need an extra 29 police officers for 2008 to keep in line with having 1 police office for each 1000 people. Instead it turns out we will need 43 new officers. We also will have to pay 5.4 million in overtime to Austin's public safety employees.

There is misconception that city growth means more money, which means lower real estate taxes. This isn't really the case. Westlake Hills, a pretty small city, has extremely low real estate taxes of .0534 compared to .4126 for Austin real estate. Houston is huge and has a tax rate of .645. City taxes are of course only one component of our overall property tax bill but they are a significant part none-the-less.

Since we are experiencing a budget shortfall due to the gross miscalculations of how much it costs to run a city, I figure this would be a good blog to discuss what factors would lead to lower taxes for Austin real estate.

If growth alone doesn't lower taxes what factors do effect taxes? First let's look at property values. Let's say the average priced home in a city is 200k. And let's say that the city is breaking even. So that if a person is living in a 200k house they are paying for their cost of the city infrastructure. Then if someone moves to the city and builds a 200k house the taxes will stay the same with that individual paying for their share of city infrastructure. So if someone comes in and builds a 500k house now the city should have more money and can lower taxes or save more money for parks or get rid of graffiti. On the other hand, if someone builds a house for 100k then they are paying for only half of their increased cost of city infrastructure. Consequently, the city will have to increase taxes. So instead of saying development leads to lower taxes, it would be more accurate to say expensive development leads to lower taxes.

Another part of the equation is density. When a city is more spread out, the cost of infrastructure per person increases. You need utilities to be spread out farther to service far flung communities. Along the same lines, firefighters and police can serve less people when people are farther spread out.

I would also argue against annexing communities being built farther out near Pfluggerville and Round Rock. The reason for this is that these areas have lots of sprawl and the houses are relatively cheap. For Austin to spend money setting up miles of utilities to annex some real estate consisting of 150k houses doesn't really seem worth it.

At the same time, I don't see the need to build roads out to communities in Cedar Park. I often hear people in the city of Cedar Park complain that Austin is not building roads out there. And not to be mean about the people complaining, but they choose to live out there and they don't pay taxes to the city of Austin. So it seems reasonable that they should look to the city of Cedar Park to address their traffic problems and not the city of Austin.

Another thing Austin should do is to continue to increase the quality of life. I'm going to end it on this point because I think its pretty important. I have sold a number of houses recently to people looking for second homes. In fact, I have sold 3 houses in the last six months for around 500k to people that planned on being here for about 2 weeks out of the year. These people can choose to buy real estate in any city they choose. The city they end up buying in will experience a benefit with regards to the tax base. These houses are still being taxed at the normal rate but since the owners are here only a few weeks out of the year, they put a minimal strain on the city infrastructure. When they are here they tend to pump money into the local economy since they are here for recreation. What I keep hearing from these people is that Austin is a desirable place and they like that it's kind of well, funky. I have heard from a number of people that all these local shops are cute but we need to think seriously about our business and the Austin economy. This view has a little bit of tunnel vision. If we are worried about Austin being a thriving city with a strong economy, we have to keep an eye on desirability.

This is one difference we have with Houston. While the taxes in Austin are high, the city taxes in Houston are much higher. I had an interesting conversation with someone from Houston recently. They were talking about how Austin wastes so much money on parks and other previous expenses. When I pointed out that in fact Austin real estate taxes were much lower than Houston real estate taxes, they seemed confused. The reason frugal Houston has such high taxes is partly due to the fact that Austin spends money on parks and other things. By making Austin more desirable, percentage wise, Austin attracts more people that live in and pay taxes on multimillion dollar homes. We also attract per capita more tax dollars from festivals and events. Our lower tax rate is even more impressive when we consider the fact that Austin doesn't get property tax revenuefrom land occupied by UT and all the government facilities related to the capitol.

Ok thats my blog I'm going to bed.