Buying Power

I had multiple cash buyers opt to step back for a bit after the stock market did a number on their portfolios this past week. I'm hearing the same from colleagues. While 5.5% may not sound high to those that have seen higher interest rates through the years, the reality is we have not seen mortgage rates this high since 2009, per Jim Gallagher with Fairway Mortgage. Just as Covid entered and changed our world on a dime, the interest rates took a sudden hike since the February, 2022 low of 3.125% to approximately 5.5% as of 5/12/2022.

Let's plug some numbers in for an example of how this translates to buying power:

$500,000 Buyer in February, 2022 at 3.125% interest. Assumptions: 

30 year conventional, 740 credit score, 80% mortgage/20% cash down ($400,000 loan). Taxes not factored as they vary. For purposes of this example, principle and interest only.  

In this scenario, the buyer would have a monthly P&I of $1,714. If all remained constant except an interest rate adjustment to current 5.5% and the buyer wanted to maintain the monthly P&I of $1,714.00, that buyer now has the ability to take out a $302,000 loan rather than $400,000. Net Net - buying power in this scenario decreased by $98,000 since February based on current interest rates. It's starting to take the wind out of some sails, but for others hunger has increased that much more in an effort to "get in" before further increase.

I just interviewed Jim Gallagher, President of Fairway Mortgage and Cathy Kantrowitz in her capacity as Assistant VP Residential Underwriting Manager with Rhinebeck Bank. It's a very informative interview if interested in the current state of the mortgage industry, do's and don't with obtaining a mortgage, process and FHA v. Conventional.  Check out the interview here.

Mortgage issues with potential tax adjustments?

There was a segment of the interview above that keeps lingering in my mind. The potential impact of adjusted upward tax impact on buyer ability to obtain expected financing. This part of the interview left me with a sinking feeling we could see a bit of a mortgage mess coming as it relates to increased taxes adjusting a buyers budget mid stream. To be adjusted at the outset is one thing. We change gears and look in a lower price point. To be adjusted once in fully executed contract on the way to the closing table is a whole other ball game. Can't help but wonder if some currently or soon to be contract buyers have last minute issue with final processing if increased assessments raise taxes. Both Jim and Cathy acknowledged this potential issue during the interview.   See the interview here.

Assessments and the Levy

I have been speaking with several municipality tax accessors as well as county in Dutchess throughout Covid in an effort to keep a pulse on tax changes for my seller and buyer clients.

Many towns with 100% assessments decided on "trending" as a means to reach 100% assessments after the explosive average sales price growth in our region. With trending, a municipality considers different factors to evaluate sales changes and then adjust assessments accordingly. Usually if a municipality trends, they are staying at 100% assessment. For example, Clinton Corners assessments went up 19% based on trending with Red Hook up 17%.  

On May 1, 2022, updated tax rolls were due for municipalities increasing assessments. My understanding is homeowners must receive notice if there was an adjusted assessment no more than 10 days prior to their municipalities grievance deadline. This deadline can vary, but for most towns in Dutchess County, for example, it’s the third Tuesday in May. Assessments can be grieved once per year with a hard deadline. If you miss the deadline, the next opportunity is May, 2023. Regardless whether you plan to sell (call me!) it is worth grieving if you have documentation warranting since buyers are highly sensitive to taxes. If your taxes are noticeably higher than comparable homes, it could affect your ultimate sale price. 

Grieving is not a slam dunk for reduced assessment. It does need to be proven warranted and agreed to municipality satisfaction that the taxes are not in line with comparable homes in the same community. I know there are many unhappy campers out there with these assessments. There was an average sale price increase realized in Dutchess County of approximately 50% since 2020 so it is a tough call what to expect in grievance.  I know professionals that help file grievances. Should you need, reach out.

There is much gray in the tax arena, but generally speaking, the levy is what can impact an increase in taxes, not necessarily the assessment as tax rates often go down when assessments go up. It is my understanding that the 2% cap in Dutchess county cannot be broken without a vote. For school taxes, I believe the levy is part of the budget vote and for property there is a public board member vote. This coming Tuesday is school budget vote in Dutchess.  

Interested in which municipalities are at 100% assessment in Dutchess County and if not 100%, how much they are? Click here for the County assessment percentage list.  

Here are links to the State’s website that illustrates how a tax bill is calculated and what happens to tax bills in different scenarios.   

1. Tax Rate Calculation – https://www.tax.ny.gov/pdf/publications/orpts/taxworks.pdf 
2. Tax Bill Scenarios - https://www.tax.ny.gov/pdf/publications/orpts/asmt-vs-taxes.pdf 

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