Inflated Prices, Taxed to Death
A wildfire is scorching the earth. Flashpoints are Texas, Florida, Colorado, Georgia, Illinois, Iowa, Kansas, Pennsylvania, North Dakota, New Jersey, Ohio, Nebraska and Wyoming. There are others.
Consider: The average U.S. home price in midyear 2020 was $371,100. In just two years, it jumped 41% to $525,100, as reported by the St. Louis Fed. Property values have risen almost 27% faster than inflation since 2020, according to another source. While homes are no longer affordable or accessible for many families, inflated values are an equally disturbing development for homeowners when property taxes come due. Observers often fail to see the role of federally backed mortgage giants Fannie Mae and Freddie Mac in creating the housing inflation underlying the surge in property taxes.
The twin mortgage giants spent the first half of the decade urging lenders to make mortgages to so-called “credit invisibles,” eliminating time-tested underwriting safeguards once required of all mortgage lenders. At about the same time, the twins began experimenting with valuation algorithms in lieu of appraisals – think “Zestimates.” Predictably, they flooded the market with borrowers having little-to-no skin in the game, those with sketchy credit histories and those willing to pay inflated sale prices based on inflated collateral valuations, which begot further inflated values.
Most alarming, thanks to the 2007-2008 financial crisis, the twins have been able to simply sell the questionable mortgage-backed securities they package to the Federal Reserve, which now holds about $2.12 trillion of this debt.
“Fannie and Freddie selling these securities to the Federal Reserve has become a way of life,” said Travis Spencer, a Texas tax-policy activist with a grassroots following. “Almost 20 years out from the Great Financial Crisis and there’s still continuous quantitative easing going on. This has become normalized, but it’s not normal.”
Mark Calabria, a former Director of the Federal Housing Finance Agency, the federal agency that regulates Fannie and Freddie, has been issuing mea culpas over lapses during his watch. Promoting his book, Calabria recently lamented to podcaster Phil Crawford that the widescale waiving of appraisals by Fannie Mae and Freddie Mac was never meant to be permanent.
“Freddie and Fannie created a pool of hyperactive buyers, flooding consumers with money, creating FOMO, creating an environment with no transparency and no safeguards,” said Spencer. “Through automated underwriting, Fannie and Freddie have driven up the prices of homes. The mortgage-backed securities created by the twins have become a weapon of mass destruction.”
The public anger in many states is reminiscent of the 1970s antitax groundswell in California that led to the passage of California’s Proposition 13, which capped annual increases in property taxes.
Texas has been ground zero for the pushback. Like Florida, Texas doesn’t have a state income tax, which puts extra focus on property-tax revenues. Assessment appeals have increased from 2022 to 2024 in the state’s most populous counties, according to Ownwell, a business that helps clients contest their property-tax bills. In Travis County, home to the state capital and the University of Texas, owners of approximately 42% of properties contested their property taxes last year, up from fewer than 30% in 2022.
To understand why appraisals are critical to control housing inflation, think of a limit on a credit card. The appraised value of the home acts like a credit card limit. It creates a hard stop as to what the borrower can borrow and, in turn, how much can be paid for the home without the buyer going out of pocket.
When there is no appraisal, that credit limit disappears, and the loan amount is based on more creative factors, such as what the buyer is willing to pay (or advised to pay by a commissioned salesperson). The U.S. taxpayer, the deep pocket in the arrangement, simply looks on as Fannie and Freddie subject them to enormous risk by waiving the appraisal.
Fannie and Freddie’s appraisal waivers and dubious related activities have been highly inflationary with the results predictable.
“A conventional appraisal is anti-inflationary,” said Barry Colen, member of a Maryland task force that investigated Fannie Mae and Freddie Mac’s use of algorithms to value properties in the Old Line State. “Waived appraisals and reliance on automated valuation models embraced by Freddie and Fannie keep appraisers from flagging unsustainable values or bubble behavior. The appraiser’s role is as an early warning signal. The appraiser is a referee position. The appraisal protects the integrity of the process.”
Colen believes Freddie and Fannie’s so-called “black box” valuation systems have caused an incrementally inflated feedback loop, resulting in synthetic values that have set inappropriately high borrowing limits for millions of individual borrowers – something podcaster Crawford has dubbed “data cancer.” This has put constant inflationary pressure on home prices nationwide, and thus on property taxes for homeowners.
Calabria has little regard for the twins after his stint as their top regulator, reminding Crawford’s listeners, “These are companies where executives cook the books to earn bonuses they don’t deserve.”
Texas tax-policy activist Spencer pulls fewer punches when it comes to Fannie and Freddie: “[Their] greed, corruption, fraud and bond debt have contributed to the current situation in the states. It has caused a property-tax firestorm.”
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See the effects of zero verification here.
https://appraisersblogs.com/uncovering-flaws-in-fha-appraisal-n-loan-review-process/
When ~40% of sales have been cash transactions for the past several years, its the good ol’e marketplace of Supply and Demand – after the industry didn’t build or produce new supply since 2007 and the non-market 3% mtg rates during the pandemic producing a demand that the supply was insufficient to meet.
During the pandemic years, I routinely saw transactions that closed with much lower appraisal values. The market simply didn’t care about the appraiser opinion. The broader market hasn’t cared about GSEs processes and will act accordingly to their motivations. I’ve seen metrics that reflect ~90-some potential buyes for every metro coastal market listing, including cash buyers. The GSEs may impact some market segments, but don’t give them more credit that supported by market motivation and dynamics. As the saying goes… don’t fight the market, simply analyze and report the market.