Earlier today Santa Clara County Assessor Larry Stone announced that the net assessed value of all real and business property declined by 2.43 percent or $7.4 billion to $296.47 billion. “This is far worse than anyone had expected. This county has not experienced such a devastating decrease in property values since the Great Depression. Assessed values during the depression were negative for three years, and even then only one year, 1933, was the reduction (3.19 percent) worse than the 2010- 11 assessment roll,” said Assessor Larry Stone. In 1932, the assessment roll declined by 2.14 percent and in 1936 it declined 0.61%. In 1978, the only other year in which the County experienced a negative assessment roll (-21.05 percent), the decline was caused by the passage of Proposition 13, a political, not economic circumstance.
“It is very difficult for me to deliver such distressing news. As a citizen and taxpayer, I am concerned about additional cuts to public schools and other public services funded by property taxes. I am concerned about the significant loss of equity by our property owners. Yet, as the Assessor, I must objectively respond to the serious decline in the marketplace,” said Stone.
“The rate of decline is especially alarming when you compare it to just two years ago when the assessment roll grew by nearly $20 billion, and in 2001, the apex of the dot-com boom, when the assessment roll grew $27 billion,” Stone said. The Assessor also noted that the rate of decline was unusually consistent throughout the County. “Santa Clara County is geographically and economically very diverse as reflected in property values. Not this year! No community, with the exception of Palo Alto, was able to escape a reduction in the assessment roll. While both Gilroy and Morgan Hill were negative 6.1 percent, Los Gatos and Los Altos were also negative at 0.7 and 0.9 percent, and San Jose ranked in the middle at negative 3.1 percent. Only Palo Alto registered positive growth at a meager 0.4 percent,” said Stone.
“This reduction is a direct consequence of the soaring unemployment rate in Santa Clara County triggered by the Great Recession. Unemployment drives nearly all the main economic components that impact property values. When unemployment increases, businesses stop investing in new buildings, cancel contracts for leased office space and reduce purchasing machinery, equipment, computers, etc. Unemployed workers are no longer able to make mortgage payments, and dramatically reduce the purchase of consumer products. The result is not only distressed sales and foreclosed homes, but major retailers, such as Mervyns, Blockbuster and Circuit City, file for bankruptcy,” said Stone.
By far the biggest surprise was the 8 percent decline in the value of business personal property including machinery, equipment, computers and fixtures. In addition, the number of businesses also declined by 8.2 percent from 46,000 businesses to 42,000.
The contraction of business, driven by unemployment and unstable financial markets, is also evidenced by the lack of investment in real estate. Major companies are downsizing or negotiating lower rents. As a result the number of commercial, industrial and retail establishments receiving reductions increased 122 percent, and the amount of the reduction more than doubled from $2.2 to $4.9 billion. “Unfortunately this is only the tip of the iceberg. Unlike the residential sector where technology assisted us in the review of 220,000 residential properties, valuing commercial properties require extensive analysis and usually a full appraisal. I fully expect this number to increase sharply over the next few years as major businesses file assessment appeals,” said Stone. In the residential sector, the number of homes receiving a temporary reduction increased from 90,214 to 117,306. However, the rate of decline slowed overall reflecting what many believe to be the bottom of the residential real estate market.
Finally, for the first time since Proposition 13 passed in 1978, the California Consumer Price Index (CCPI) was negative by 0.237 percent. Proposition 13 provides that the assessed value of all real property cannot increase by more than two percent annually, unless there is a change of ownership or new construction. As a result, an estimated 350,000 property owners will receive a reduction in the assessed value of their property, totaling $6 billion, including properties in which the assessed value is significantly below the market value.
“If there is any silver lining to this news, it is that homes are more affordable now than they have been in more than a decade. That is good news for the high technology companies who will ultimately lead us out of this economic crisis. We need local companies to start hiring again, and high housing costs have always been an impediment,” said Stone.
In the Silicon Valley Leadership Group’s recently published CEO survey, “high housing costs for employees” was cited once again, as the number one business challenge, and remains one of the top five concerns for Silicon Valley CEO’s.