Saturday, May 16, 2015

All land in Florida is worthless

Land in Florida should be considered worthless today if it will eventually be flooded/unliveable as a result of sea level increases.  Where worthless means that if you own any such land, you should immediately sell it for whatever you can get, because whatever you can get is more likely to decrease than increase tommorow.

To understand this, you'll need to first understand how real estate is valued.  The short version, is that the only monetary reason to buy a house as that you expect it to increase in value.  All other revenues and costs tend to come slightly below break even.

A tax and interest rate normalized home

The importance of assuming a standard interest and property tax rate is discussed in the next section, but a 5% mortgage interest rate is the sign of a "normal economy", and if interest rates will eventually go up to 5% then your home will eventually drop in value as a result of affordability (main component of real estate value assuming constant liveability) impacts on potential buyers.

Annual Cost per $100k of home value
  • 5% interest.  The best mortgage rates.  (If you paid all cash, you can usually get 0.5% less interest than the best mortgage rate from government bonds)
  • 1.5% property tax.
  • 1% to 0,5% in sales commissions/transfer costs.  The average home is resold in 5 years.  5% in sales commissions from the round trip of buying and selling would make a 1% cost.  Keeping the home for 10 years lowers this cost to 0.5%
  • 0.2% insurance.
  • 5% maintenance and upkeep.  Every 25 years the roof must be redone.  Heating, cooling, plumbing, electrical, driveways, sump pumps, applicances are other costs that pop up regularly.  You can also add small things such as mowing the lawn in that you don't have to do any maintenance whatsoever on a government bond.  Also included in upkeep is the cost of modernizing the decor to maintain resale value.
It costs 12.7% of a home's value in operating expenses, while the rental value tends to be about 12%. So the profit to be made from home ownership is entirely the resale appreciation value, and there is a builtin "hopeful future" presumption that price might appreciate 0.7% per year.

liveability and affordability
For a housing market as a whole, liveability refers to the area's "benefits of living there".  Primarily the availability of jobs, but education, culture, climate, and federally subsidized huricane relief programs also count.

Affordability is mainly affected by interest rates and property taxes, but the cost of maintenance upkeep can also vary by area.  Affordability has nothing to do with the home's price.  The "presumably hopeful" model implies small appreciation, and everything is affordable to someone if it is certain to go up in value.  If interest rates go from 5% to 2.5%, then the real estate industry is good at getting people to understand that a home value changes from $100k to $200k, because both have the same mortgage payment.  It is however a major problem for home owners to have interest rates go back to normal, as that means a 50% cut in resale value.  Even though the real estate industry encourages most people to buy when homes peak in affordability, its actually the best time to sell.

Property taxes and Detroit
Property tax is very similar to paying rent to society for land that you "own".  It is a fair tax in that your ownership deprives the rest of society from owning the same land, and the tracing of ownership is as trivial as someone sat on it first.  Fairness can also be sought in the value of services and livability received in exchange of taxes.  What can be unfair is the unilateral power to gift or steal by changing the property tax rates.  Even less fair than property taxes is the fascism of asset forfeiture rules that bring swat teams to attack your in home poker game such that your stuff can be seized.  This is fascism that affects white people!  City fee increases are also a form of unilateral tax increases that are designed to fool the housing market's ability to make rational home purchase decisions.

Detroit's $500 houses are the result of increasing tax rates in the face of decreasing livability.  As people flea lowered liveable conditions and higher taxes, higher taxes and fewer services just extends the spiral.  A $500 house has that value because living there is not worth the tax bill.

Those $500 houses did not start out at that value, and represents a significant financial loss to many along the way, and the city bankruptcy will create more losses.

Land that is under water is worth 0. Multi-trillion dollar projects such as building a dike/levee system around the state would also bring the land value close to 0 if the tax increases mean that Florida becomes as poor of an ownership proposition as Detroit.

 If there is Florida land that is worth $100k at breakeven maintenance and normalized interest costs within the presumably hopeful model, then purchasing value exists only if you can buy it at a discount such that you can profit from the positive rental value created by the discount.  Purchasing florida land at a 50% discount provides for a 2.5% annual rental profit.  If the value decreases by 50% in the next 20 years, then you still break even as a result of the rental profit.  You also break even if you keep the property for 40 years, and it is worth 0 then.  But this is only possible if you are able to obtain a 50% discount from the normally presumably "hopeful future" price that homes have.  It also assumes no significant property tax hikes.

2030 is only 15 years away.  If sustainability hopelessness has sunk in by then, then that is all it takes for precipitous land value decline.  There only needs to be the prospects of trillion dollar dike mitigation plans to send land value and livability plummeting.  Florida doesn't need to be flooded to become worthless.  It just needs to understand that it will be worthless to become worthless.

2100 will one day be the visible future.  So will 2150.  In terms of land value, if 2150 is hopeless then today is hopeless.  Let me define stupid as simply being slow to understand, and susceptible to manipulation by wolves during their slow period.  Only the stupid don't understand the hopelessness yet, but it will eventually sink in as obviously as Greek or Detroit bonds not being viable investment today.

The logic of climate and bankruptcy denial
In one of my better essays I point out that there is a problem with democracy if most of the people and money voting only care about sustaining the economy and their lifestyles for the next 20 years because they expect to check out around that time frame.

For non scientists, climate change acceptance or denial is a faith based decision.  If a priest (or media puppet) will tell you that choosing faith in denial allows you to not make any sacrifices, that has obvious appeal compared to a faith that costs sacrifices.

For politicians, appealing to the more hopeful faith is easiest.  In the case of North Carolina's ban on accepting sea level rise, the main motivator is that entire beach front communities would be condemned (worth 0) if correct sea level rise models were accepted.  The land is still worthless, but it is a vital economic issue for those community landowners to borrow time to find someone retarded and unaware of the worthlessness to sell their land to.  Widespread disruptions occur when land prices pop, and hamsters seem happier if the wheel keeps spinning.

Attempting to maintain a lie as long as possible always makes sense to preserve the benefits of the lie.  It is still of course evil, and perpetuating the lie increases the eventual costs of dealing with the failure.  This never matters to the liar.

A motivator for climate action
Florida land is only worthless if it gets flooded.  It would be a far more useful step in preventing the outcome if Florida politicans were begging the rest of the world to prevent this rather than leading the denial effort.
These direct economic costs though do drive decision making all over the world.  Pretending your land will not become worthless necessarily ensures that it does because you are the one that should care the most.

Canada and Minnesota
If Florida land is worthless, and Canada and Minnesota will become tropical paradises, then that is where you should buy land.  It also explains Canada's hypocrisy on climate change where it ignores its climate treaty commitments, and promotes oil use and development.  Canada's conservative governement (and perhaps its other parties) are not to be trusted to not only continue oil promotion, but not to be trusted to increase Canada's land value by wishing for the destruction of the rest of the world.

The needed policy solution
Increase fossil fuel derived energy taxes such that gasoline costs $10/gallon (about $7/gal in new taxes. Up to $960B revenue with unchanged use.), and electricity rates are $0.30/kwh (about $0.15/kwh in new taxes.  Up to $409B revenue with unchanged use) (from fossil fuel based sources).  This can be offset with basic income paid by the tax increases.  Basic income is an equal cash amount paid to each adult citizen.

In this case, the amount of this basic income cheque would be based on the average energy expenses of each American.  Likely about $4000-$4800 per person (based on 240M adults).  If we can expect the average person to reduce energy costs by 20%, then we can consider an energy-tax-dividend cheque of 80% of the expected unchanged energy consumption costs.

For the average American, there would be no net cost from these high energy taxes.  The dividend cheque pays for the extra expenses exactly.  For those with small homes and small or no cars, then its a net benefit.  Those with large homes are those most able to afford solar electric and heating systems that would let them avoid the taxes.  Everyone would fix poor insulation and innefficient systems.

It would further prevent any new oil refineries, pipelines, coal and gas plant from ever being built.  There doesn't need to be any subsidies for clean energy because they will become significantly cost preferential due to the taxation of CO2.

Part of a larger UBI program
A $4000 energy tax dividend cheque significantly helps in providing a total UBI of $15k (or $16k to cover the poor's extra energy expenses) while limiting other tax disruptions.

Since I mentioned property taxes and the relationship to livability in this essay, this is a good place to introduce how local funding can contribute to a total UBI available to a resident.  Increasing property taxes by 2% of market value sounds high, but its not if it is redistributed to every resident.  Those with the largest houses pay more again, but they have the same option as everyone else to increase the density of people in their homes.  Increasing density also helps reduce energy use.

Such a property tax would increase the liveability of a city by more than the tax cost, and so increase the market value of homes.  Its more affordable to live in the city for renters and so homeowners can increase their rents, or get good rates for boarders.  If total UBI (including federal province/state) is high enough, then massive city budget items related to homelessness and crime can be slashed and significantly improve livability at lower social operating costs.

Providing an additional $2000 from local revenue ($3000 after police and homelessness cuts) towards UBI would make more expensive urban centers more livable and desirable, and would let cities compete on progressiveness.  Conservative shitholes can stay shitholes if they prefer lower land values with no taxes, and bringing it back to Florida, if they prefer policies that will drown them, its not Canadians or Minnesotans that should have to convince them otherwise.


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