A recent Wall Street Journal report, “Wealthy Greenwich Home Sellers Give in to Market Reality,” on Connecticut’s real estate market should concern all New Jersey residents.
The report documents a severe price decline among high-end real estate in the Nutmeg State’s most exclusive areas, notably Greenwich, long a symbol of modern American affluence. Despite America’s booming economy, the report cited numerous reports of owners selling homes for far below what they paid a decade or more ago. This was typically preceded by these homeowners' establishing residences in more fiscally attractive states like Florida. (Sound familiar, New Jersey?)
The evidence is staggering. The median home price in Greenwich dropped by 16.7% last year to $1.5 million in the fourth quarter of 2018, according to a report by brokerage Douglas Elliman, with early reports showing a 25% decrease in early 2019. In a jarring anecdote, the Journal cited “a stately Colonial-style home on Greenwich, Conn.’s tony Round Hill Road is being sold in a way that was once unthinkable in one of the country’s most affluent communities: It is getting auctioned off. Once asking $3.795 million, the four-bedroom property will be sold … for a reserve price of just $1.8 million.”
When Garden State Initiative launched in 2017, our first research report, “Connecticut’s Fiscal Crisis Is a Cautionary Tale for New Jersey,” detailed how our neighbor up I-95, with its struggling economy, saddled with massive public debt and high taxes, served as a “canary in the coal mine” for what New Jersey will face unless we get our own fiscal house in order.
The storm that is currently hitting Connecticut’s real estate market has clouds gathering in New Jersey.
When the wealthy flee a state, sustaining massive losses on their homes in the process, it is unfortunate for the individual but likely devastating for those remaining, particularly if this occurs in New Jersey due to our extraordinary reliance on property tax revenues to sustain local governments and schools.
The research firm Wealth X reported that New Jersey lost 5,700 people with liquid assets from $1 million to $30 million in 2018 — and that’s before the implications of the state and local tax (SALT) cap on federal taxes were truly felt. Recent reports indicate that New Jersey’s income tax receipts are falling well below projections.
Discussions around yet another tax increase on the wealthy, to fund the nearly $40 billion state budget, will only exacerbate the exodus of wealth. As reference, Connecticut has a top marginal tax rate of 6.99%; last year’s budget agreement increased New Jersey’s to 10.75%. The top 2% of all New Jersey income tax filers (those making $500,000 per year) account for over 40% of all income tax revenue to the state. Since close to 40% of state revenues are from personal income taxes, increasing dependence on this group exacerbates our vulnerability at both the state and local levels. An individual loss in this income category reverberates throughout the state.
The risk now is not just those wealthy fleeing our state. As high-end real estate values deflate, as in Greenwich, the taxes to support our local governments and schools will be redistributed to moderate- and lower-value property owners.
A recent Monmouth University poll illustrates that New Jersey residents’ views of the quality of life in our state are tumbling to an all-time low. The latest poll shows that only 50% of residents are positive, down from the prior result of 54%, and in no surprise, 45% of residents named property taxes as the state’s most pressing issue.
The only alternative is for our local and state governments to go on a diet now, lower their costs to operate and get ahead of this collision of events. Those with an inclination to reduce spending and the size of government are the leaders who understand New Jersey and know that, without intervention, the inescapable cascade of escalating property taxes will be ruin for all of us.
Regina M. Egea is president of Garden State Initiative, an independent research and educational organization dedicated to making New Jersey once again a place where families and businesses can thrive.