Reuters Edge

Housing gain would aid U.S. states' budgets

MIAMI (Reuters) - A slight pickup in the U.S. housing market in February was a welcome sign, not only for the larger economy, but also for state governments whose budgets have been hard hit by a drop in taxes linked to home sales.

Housing sales across the country remain slow and economists generally predict a long slog through large inventories of available homes before prices steady and turn upward.

But some month-to-month indicators, such as a pending homes sales index from the National Association of Realtors trade group, show the numbers of transactions are picking up.

More than two-thirds, or 34, of state governments, as well as many cities and other local governments, collect taxes on home sales. They lost significant revenues as the U.S. housing boom reversed and property transactions dwindled.

State governments looking at starkly higher spending on unemployment benefits, healthcare and other services have moved beyond belt-tightening since the recession began in late 2007. They are now cutting long-range projects and sometimes issuing bonds to cover operating expenses.

At the peak of the U.S. housing boom in early 2006, some state governments collected as much as 13 percent of general fund revenues from property transaction levies, while most collected 5 percent or 6 percent of general revenue that way.

“Now, they are seeing less than half of that,” said Mark McMullen, a senior economist at Moody’s who tracks government finances. “About 3 percent is typical” now, he said.

Budget gaps for the 50 states and the District of Columbia were expected to total $51 billion in fiscal 2009 ending in June and widen to $93.5 billion in the 12 months starting July 1, according to the Council of State Governments.

Florida and Michigan are among states that have had sharp drops in real estate transaction taxes. Chicago last month reported a $20 million decline in transaction taxes so far this year from early 2008.

Bureaucrats overseeing mass transport in the New York City region pointed to fall-offs in property transaction taxes and other revenues when they approved stiff increases last month for tolls, ticket prices and subway fares.

Delaware’s New Castle County is eyeing a 25 percent hike in property taxes, partly because real estate transfer taxes have dropped and aggravated a county budget deficit.

“It was big swing, a boom and bust cycle,” said McMullen.

The NAR index of signed house-sales contracts issued this week showed a 2.1 percentage point improvement in February over January, with double-digit increases in the Northeast, Midwest and West. But the index was still weaker in all regions in comparison with February 2008.

The federal government last week said sales of new single-family homes rose 4.7 percent in February from January, though the Commerce Department data showed transactions were 41 percent below the year-earlier pace.

“The upside is that the drop in transactions has largely bottomed out, though we don’t expect much in the way of price recovery,” McMullen said. “For transactions, the bleeding has stopped.”

Florida, a state with no personal income tax, especially relies on revenue from transaction-related fees such as those on consumer sales, lodging and property transfers and sees no upturn in real-estate transfer taxes until next year.

The state was an epicenter of the U.S. housing boom. It felt a downturn earlier than most other locales and is now badly weighed down by high mortgage foreclosure rates, dropping homes prices and slowing population growth.

State revenues tied to real estate have tanked. Florida’s real estate transfer revenue is forecast at a disappointing $1 billion for the fiscal year ending in June and expected to drop about 24 percent to $760 million next year. Only then is it expected to start recovering, according to Amy Baker, the state legislature’s chief economist.

“What we really need to happen is for the national economy to recover, for people to resume their normal patterns,” Baker said. “We need that restoration of normal migration.”

Editing by Dan Grebler