Market Update Feb 27, 2024 - Property Tax Implications, FHA Payment Relief, and Realtor Commissions

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Hey there, all you real estate rock stars. You know, if homes were a language, I'd say today's market is speaking in tongues because it's really hard to tell what the hell's going on, but this is the Texas Real estate and finance podcast market update for the week of February the 27th. I'm your host, Mike Mills, a local North Texas mortgage banker with Mike Mills Mortgage and Finance. So let's see if today we can help you guys translate all the big stories affecting our market and your business. So I have a story for you today that might make your wallet wits just a little.

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It's about property taxes and their mysterious power to transfer your mortgage payment into a bank account nightmare within the first two years of you buying your home. So stay tuned to the end to find out how you can see this train coming before it hits you. All right, so let's get ready for a whirlwind tour of real estate revelations today. We're going to kick off our episode today with mortgage interest rates. Are they spinning out of control or just stumbling out of the block a little bit?

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Then we're going to take a look at why homeowners nowadays are more like a vintage wine, better with age and staying put a lot longer. And after that, we'll examine FHA's new strategy to help struggling homeowners. Is it just a temporary fixer upper, or does it have a solid financial foundation? And let's not forget about Warren Buffett's overflowing piggy bank. Is he still the wizard of Wall street, or is he just holding out on us right now?

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And I'll also take a look at the latest news in real estate commissions and how the Department of Justice is chiming in. And it's not in a good way. And finally, we tackle the main event today, the ins and outs of property taxes and the hidden little gremlins that can wreck your mortgage payment. But before we start, if this podcast acts as your part time real estate guru, then help me spread the word. Hit like comment with your smartest takes, subscribe for knowledge nuggets and share it like that hot gossip from your family reunion.

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And if you really want to help an old man out, drop me a review. Your support helps write our success story. Now let's get on with the show. So, where do we start? Well, as always, say it with me, Mike.

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What are the rates today? So, in a market where mortgage rates are inching further over 7% every day, the big question on everyone's mind is, what's coming next? Well, last week mortgage rates were barreling much closer to 7%, with the figures showing a jump in both 30 year and 15 year fixed rates. And despite a strong economy, these sticky high rates are starting to cast a shadow over the spring home buying season, further pushing the affordability for prospective homebuyers. So last week, the 30 year fixed rate mortgage averaged about 6.9% as of February the 22nd, and that's up from the previous weeks of 6.7% and as of yesterday, touching 7% again.

00:02:26
The 15 year fixed rate now is at 6.29, rising from 6.12 the prior week. Sam cater, Freddie Mac's chief economist, attributes the rate increases to strong economic and inflation data. This current economic cycle is unique, differing from historical norms due to the low housing affordability. And you see good economic news is kind of bad for homebuyers because it leads to less affordability due to rate increases trying to slow the economy down. And right now, no immediate rate cuts are expected from the Federal Reserve, as indicated by their most recent FOMC minutes.

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Overall, the Fed is waiting for greater confidence that inflation is receding before it considers cutting rates. But new listings are starting to surge, indicating a possible strong home buying season this spring. But rising mortgage rates could disrupt plans for rate sensitive buyers. So this uptick in mortgage rates nearing 7% is a clear indicator of the economy's reaction to inflation and policy changes. While it is a sign of a strong economy, the impact on the housing market is very clear.

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Buyers are still cautious and sellers might have to adjust their expectations on timelines for selling. So what's the takeaway here? Well, the mortgage rate trend is a barometer for the real estate market as a whole. It's essential for us to stay on top of these trends as they directly influence buying and selling decisions from your customers. And in the business of setting expectations, which is what we do, understanding where things are headed is what sets you apart from the competition.

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And quite honestly, with rates like these, I'm starting to think my piggy bank might need a side hustle. I am told I have the face of a hand model. All right, next up, it seems that the american dream of homeownership might be slightly evolving. Redfin's recent analysis of homeowner tenure uncovered some intriguing facts about America's favorite generation, the baby boomers. So, according to Redfin, the typical us homeowner now remains in their home for an average of about twelve years.

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This is a notable increase from previous years. This trend is driven largely by older Americans opting to age in place and a combination of other economic factors affecting the housing market overall. So the amount of time that people stay in their homes increased to about twelve years from the previous six and a half years back in 2005. Overall, older Americans, especially those over 65, are largely staying in place. See, high mortgage rates and rental prices are starting to discourage people from moving around.

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And this creates challenges for first time homebuyers due to inventory shortages. And in Texas, the real estate market has its own unique challenges and opportunities. You see, the trend of longer homeownership tenure reported here by Redfin is particularly impactful in our state, given the rapid population growth and massive economic development that we've been witnessing. You see, the situation is kind of a double edged sword. Stability for current homeowners is great, but a higher barrier to entry for new buyers, especially in high demand areas.

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So the takeaway from this Redfin report is clear. The market is shifting towards longer homeownership tenure, and understanding this is vital as it impacts how we approach everything from listing strategies to setting expectations for first time home buyers. So it seems like these days, selling your home is like giving up a good parking spot at a crowded mall on Black Friday. Once you're in that sweet spot, why would you ever leave? All right, what's next?

00:05:24
So do you have past clients worried about keeping up with their mortgage payments? Well, FHA's new payment supplement partial claim might be the help that they need. So according to Housingwire, FHA has introduced an innovative loss mitigation tool, the payment supplement partial claim. So this program offers interest free loans to help borrowers catch up on late payments, adding them to the principal and extending the term of their loan. It's a significant step towards assisting homeowners in managing their mortgage obligations more effectively.

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See, right now, FHA mortgage delinquencies are on the rise, and these interest free loans offered by HUD are a possible solution to some of these delinquencies. People get a monthly principal reduction for a full three years, and ultimately this is going to be intended as a permanent loss mitigation option for HUD and FHA. And I know right now everything in the economy looks great, but there are indicators of some economic turbulence that might be ahead. And this FHA move could be a very timely one because it's a balancing act between aiding borrowers and maintaining good market stability. My view is that this is a proactive step towards cushioning the blow for homeowners, potentially easing the burden for people suffering from job instability.

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But it could also keep more homes from coming available. That otherwise would in a downturning economy. So why does this matter? Well, education and support for our clients is paramount. This FHA initiative offers a new avenue to assist homeowners in distress.

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And as real estate professionals, our role in guiding clients through these options is more important than ever. I guess with this, FHA is going to be given HGTV a run for its money with home makeovers. Instead of new curtains, it's new payment plans. But, hey, every little bit helps. All right, let's take a look at where some big money is laying these days.

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So, Warren Buffett's Berkshire Hathaway is stashing cash at unprecedented level. So does this indicate a lack of confidence in the current market? And how could this possibly impact real estate? So, Berkshire Hathaway has significantly increased its cash reserves, hinting at possible caution in the current economic climate. The company has shifted investments from stocks to bonds, reflecting an overall strategy of change in response to ongoing market conditions.

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So Berkshire's cash reserves decreased from 45 billion to 26 billion, while treasury bills increased to 126,000,000,000. They sold about 10% of their Chevron stake, reducing their value from 21 billion to 18.6 billion. They collected over 11 billion in interest and dividends, nearly double from the previous year. And the selloff strategy shift started when the Federal Reserve started to hike rates over 5%. And they've recently accelerated stock buyback, spending 800 million in just over a month.

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And on the housing side of things, last year, Warren Buffett bought over 5 million shares in Dr. Horton. And just last week, he sold them all. So he sold all of his shares in one company that he owned for less than a year. That is not typical behavior for Mr.

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Buffett. So what does that mean? Well, Buffett's actions could be interpreted as reading the tea leaves of the economy, or it could be just an old dog having a bit of caution. For those of us in real estate, however, it's crucial to stay alert to these big economic Goliaths. They often give us a heads up on potential shifts in the housing market.

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Now, time will tell if Buffett is saving cash to buy the dip or if he's just reshuffling his stock portfolio. But I will say Buffett's taking saving for a rainy day and taking it to a whole new level. Maybe he's just saving to buy a really, really big umbrella. All right, let's talk about commissions. Now, realtors, brace yourself.

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The Department of Justice is trying to shake up your commission structure. Are you ready for what may be coming? So in a recent statement of interest, the Department of Justice expressed its desire to decouple commissions in the real estate industry overall. Now, this proposal challenges the long standing practice of what's called cooperative compensation, where listing agents offer compensation to buyer's agents in multiple listing services, or MLSs. Now, industry experts including Steve Murray and Ted Tozer recently weighed in on the potential consequences of this change.

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You see, this change could lead to buyers negotiating their broker fees directly with their agent. Steve Murray, the co founder of Realtrends Consulting, believes that if the court accepts the DOJ's proposal, it would be detrimental to both the real estate industry and millions of homebuyers. Ted Tozer, former president of Jenny Mae, agrees with the Department of Justice stance to some extent, suggesting that buyers should have the freedom to negotiate the level of service that they receive from their broker. And Gary Acosta, the CEO of the National association of Hispanic Real Estate Professionals, shares concerns about the potential impact on first time homebuyers who may struggle to afford additional broker fees. Now let's take a moment to unpack what this could mean for the real estate market as it stands today.

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In my opinion, while the DOJ's intention is to promote transparency and competition is admirable, the proposed decoupling of commissions could create significant challenges for both buyers and sellers. Now, I went into much more depth on this topic in my market update from last week. So if you haven't listened to that one, go check it out. But overall, why does this matter to you as a real estate professional? Well, you see, the potential shift in commission structures could reshape how transactions are conducted across the industry, impacting your bottom line and the overall dynamics of the market as a whole.

00:10:16
You have to stay engaged and informed on these discussions surrounding these proposed changes to ensure that the interest of both your buyers, sellers and you are adequately represented in any future regulations. Because right now we are embarking on a roller coaster of real estate regulatory reform. I really, really hope for smooth sailing, but I'm warning you, you better buckle up because this is going to get bumpy. You know, guys, I'm just going to say, if you have not been paying attention to this story about all of the real Estate commission lawsuits and what's happening with the Department of Justice, then it's something that you need to pay attention to, because this is going to get to the very core of how you make your living, and it's going to affect your pocketbook, it's going to affect your buyers, and it's going to affect your sellers and you have to be aware of what's happening, because as an industry, we're losing the entities like Nar and some of these mlss because they're running out of money for these lawsuits. And there's less and less people that are going to defend your ability to earn an income.

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And if you don't fight against it because you're not aware of it, then we could look up in two years and our entire market and our entire industry could be very, very different, controlled by large corporations and not individual realtors. So you need to pay attention and you need to start fighting back. Always good vibes. Always good vibes. Fun to talk about this stuff, for sure.

00:11:28
Okay, so let's move on to our main topic for today. Have you ever wondered why your client's mortgage payment can skyrocket out of nowhere? Well, as much as I'd like to say that the bank's screwing you over, more often than not, it's your property taxes that jump up shortly after you buy your home. So why does this happen? Well, if you live in Texas or anywhere with high property taxes, it all has to do with your taxable value.

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Let me explain. So right now, the rising cost of homeownership is already a major problem across the country. In fact, the federal government is currently offering millions of dollars to companies or nonprofits to help find a solution for this. That's how bad it's getting. Insurance premiums have gone way up.

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I did an episode about that a couple of weeks ago, if you want to check that out. Interest rates are high, home prices are high, and taxes have gone up due to increased home value. So let's imagine this scenario. You or your clients buy a home from a nice old couple that's lived there for over 20 years. It's in great shape because they took really good care of it, and it's in a great location for you and your family.

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But the way property taxes work in the state of Texas is that if you own the home that you are living in, the county cannot raise your taxable value more than 10% a year. So if someone's lived in their home for a really long time, their taxable value can be significantly lower than the actual value of the home. This is good for the homeowner because it means they can't be priced out of their house. But once the property changes hands and someone else buys it, then the county can come in and raise the taxable value to whatever level they feel is accurate. But they can only do it one time.

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And when you buy your new home. You often inherit the current homeowner's value and exemptions if you qualify. Like for example, you can't get an over 65 exemption carried over if you aren't over 65, but you can get a homestead exemption carried over if you're going to live in the house. You see, unless your lender explains to you that the taxes and overall payment on the house that you're about to buy is lower than a normal home at that price because the taxable value is so low, then you're going to have no idea. You're just going to have a pretty low payment and be really thrilled about it.

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But in twelve to 18 months, the county is going to come in and reevaluate your property because it changed hands and they're going to raise your taxable value and therefore raise your overall mortgage payment. And odds are when they do this, it'll be when the taxes are due at the start of the first full calendar year that you own the home. And sometimes it can take up to two full years for this to happen. But when it does, you're going to have a shortage in your escrow account balance because the bank has not been collecting on the new taxable value because all they had to go off was the old one when you first started your loan. And this is how taxes work.

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They're paid in arrears, so you don't know how much you owe until the year is up. And at that point you've already collected for all the taxes for that year. So in order to make up this shortage in your escrow account, you either have to pay out of pocket in one lump sum or you can spread the shortage out over the next twelve months. But the bank also has to raise your payment to collect for the new taxable amount as well. So if your taxes were short by, say, $2,400, the bank has to collect for $200 a month that you were short and they have to collect for the $200 a month to make sure that you aren't short next time.

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So your mortgage payment just jumped up $400 overnight and unfortunately, there's absolutely nothing that you can do about it now. If nothing else changes next year, then your payment should actually decrease by $200 because you caught up from the shortage. But that's only if your taxes don't go up again, which they could, but it shouldn't be as much the second time around because as the new homeowner, you have the 10% cap in place for you. Really sucks, right? And unfortunately, it can be worse if you're buying a brand new home.

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You see, builders pay even less in taxes because they pay on what's called unimproved land. So they're only paying taxes on the value of the raw land without a house, even if there's a house currently on the property. And the builders lenders will often set your payment based on these unimproved taxable values. Now, why would they do something like that? Well, because it means a lower payment and lower closing cost for you right out of the chute.

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And they want you to be happy with your decision to buy their home through them. But if they don't explain this to you, then your taxes will go up once the county assesses the property with the house and the land. And in that case, your taxes can go up dramatically, and therefore your payment will also go up dramatically. So what do you do about this? Well, first off, make sure you ask your mortgage lender these questions about the property that you're buying.

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What's the current taxable value? Is it less than what you're actually paying for the home when you buy it? If the building is new, ask the lender to either make your tax collection in your escrow more, or if you do want to have that super low payment for a year, then you just need to be aware that when the bill comes due at some point, you make sure you have some money put aside for when that happens. And these days, most counties in Texas have a tool in their property tax lookup section online that can estimate what the taxes will be based on a higher taxable value. All you have to do is just plug in what you paid for the house and see what the taxes could be.

00:16:08
Worst case scenario, and often the county will not raise to the full value that you paid unless you send them what you paid for the home, like a copy of your contract tracks. So don't do that, especially when you go to file for your homestead exemption. All you need to do is send them a copy of your driver's license with a new address on it. Now, I personally use these online resources all the time to estimate taxes for my clients and prepare them for when the values are much lower than what they're paying for the home. And one other thing I recommend is hiring someone to argue your tax value for you.

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Now, you, of course, can do it yourself, and there is no charge for that. But when you hire someone to do it for you who's been doing it for years and probably knows everyone in the county tax office, your likelihood of keeping your taxable value low is much, much better. I know this because I've been doing it myself for years. I pay the same guy every single year, and my taxable value on my current home is very reflective of that. Let's just say I'd pay this guy double what he charges for the money he saved me over the last eight years on my current home.

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So here's the deal. The tax man is going to collect his money no matter what, and there isn't a whole lot you can do about it. But don't let yourself be blindsided by a huge property tax bill right after you buy your dream home, because that is totally a buzkill. You just need to be aware and prepare for that possible scenario. If it applies in your case, you may not be able to do much to change it or keep it from happening, but at least if you're prepared, you can be ready when it does, or even make a decision to buy another home if you need to, because you've had a great mortgage banker to give you a heads up before you wrote your offer because you knew about the higher payment that could be coming down the line.

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And realtors, you need to be just as involved in this. Check those taxes and make sure that they look right. If they're really low, there's usually a reason and you don't want your clients put in a bad spot down the road. Referrals are the name of the game in real estate, and clients that have bad surprises after they buy their home are much less likely to recommend you to their friends and family. So research and educate.

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And one little quick note, since we're on the topic of taxes, capital gains tax, I get this question all the time. Just for the record, you can sell your primary residence, not an investment property, your primary residence, and avoid paying capital gains taxes on the first $250,000 of your profits, not what you sell it for. If your tax filing status is single and if you're married, you can avoid up to $500,000 in taxes on your profit. Now, this exemption is only available once every two years, which means you have to live in the house at least two years before you can qualify for this exemption on the capital gain. So tax info abound today.

00:18:32
Well, folks, there you have it. Another episode packed with a ton of market info that is impacting your business, whether you know it or not. Mortgage rates, property taxes, and a peek into the mind of one of our market wizards. Think of all these episodes as your personal intel brief, keeping you in the loop with all the events impacting this crazy business that we all keep coming back to. So join me on Thursday when I'll be joined by Morgan Smith.

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Morgan is an encyclopedia of innovative loan products. We're going beyond the conventional exploring loan options that you might not even know exist. This is going to be a great one to help those clients with very unique circumstances. So don't miss out on that one. Well, guys, it's been real and it has been fun.

00:19:09
Thanks for hanging out with me today. Remember, be good humans and keep grinding, because life is what you make it. So make it great. I'll see you again next week.