Do you think San Bernardino will rebound from bankruptcy as quickly as Orange County did in 1994?

  • No (92%, 101 Votes)
  • Yes (8%, 9 Votes)

Total Voters: 110

High foreclosure rates may bankrupt cities, a recent news article reports.

San Bernardino, Stockton and Mammoth Lakes each declared bankruptcy this year. The high foreclosure rates in all but Mammoth Lakes (whose bankruptcy was due to a court judgment) indicates a tangible connection between residential foreclosures and city insolvency.

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Foreclosures have further depressed already-low housing prices in these cities, thereby reducing city revenues due to plummeting property taxes.

Between 2006 and 2009, property values in San Bernardino dropped 65.6%. Though prices have increased since 2009, they remain at less than half their bubble value in 2006. Low assessed property values mean low property taxes, causing revenue shortfalls for local governments – something California is especially susceptible to under Proposition 13 (Prop. 13).

However, experts are wary of attributing city bankruptcies exclusively to foreclosures. Three bankruptcies in a row may be unsettling, financial experts acknowledge, but do not make a trend.

first tuesday take

Prop. 13, enacted in 1978, undeniably benefits homeowners on an individual level as it allows them to have their property reassessed annually and taxed based on the lesser of:

  • the last purchase price received on the property; or
  • the current fair market value (FMV) of the property, as determined by the county assessor.

However, what is good for the household finances of the individual in the short term is not always good for the whole. Thus, San Bernardino’s bankruptcy is evidence of one of the several repercussions of low property taxes: insufficient revenue to maintain solvency and municipal services. Further, this decreases the attraction of the city to new residents, quelling its ability to grow and prosper.

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San Bernardino and Stockton have been hit by manifold challenges to the stability of their respective housing markets. In addition to depleted property tax coffers, both cities have exceptionally high unemployment rates. In May of 2012, Stockton’s unemployment rate was 14.5%; San Bernardino’s rate was 11.8% — both higher than the California average of 10.8%, some 2% higher than national numbers.

Let’s trace the problem back to its inception. Which came first, high unemployment, or increased foreclosures? For both cities, high unemployment led to exceptionally high foreclosure rates, which blight neighborhoods and decrease property values, resulting in lower property taxes and reduced city employment and services.
Notice the cloying irony of this self-perpetuating cycle?

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Thus, the cities’ housing market recovery is impeded by more than just foreclosures; San Bernardino’s “location, location, location,” mantra may become transmuted in homebuyers’ ears as “underwater, unemployed, insolvent.”

The factors which led to the city’s bankruptcy, combined with the stigma resulting from its declaration, may significantly injure the desirability of property located in the region—a hugely influential factor in home sales.

But perhaps this news does not foreshadow such a gloomy future, after all. Orange County’s 1994 bankruptcy didn’t tarnish the region’s appeal to later homebuyers. Instead, the county maintains an image of relative affluence and success. Unfortunately, San Bernardino’s high unemployment rate (and less desirable location) distinguishes it from Orange County (which has an unemployment rate of 10.2%). This ultimately may be the difference between a brief, public gaffe and a more prolonged convalescence.

Which will be the fate of San Bernardino? Only time will tell.

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Re: “More city bankruptcies on California horizon?” by Market Watch