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.
What metro coastal market?
I’ve seen many contracts that state – the homeowner agrees to pay the difference between the contract price and the appraised value – up to $30,000 in some cases. It’s concerning!
Being in San Diego, I have a 10 property refinance streak where they are all worth less today then what they were bought for over the past 18 months. Its interesting to see that eight of the ten were bid up from the original list price and of those eight five went into contract with the “appraisal waiver” box being checked on the CA purchase contract. If you seek the truth, and analyze prior sales data and transfer history like your supposed to its amazing what gets revealed.
When you have appraisers who coach/sell systems and say they can do 4 to 9 appraisals a day, its no wonder that “data cancer” is a real thing.
Seek the truth.
This is silly. These buyers put an offer in to buy a house at price $X, purchased it, and now they are saying it wasn’t worth $X and they want a tax cut?
You must be a tax appraiser.
I’m almost out of it.
CL said; I’ve seen many contracts that state – the homeowner agrees to pay the difference between the contract price and the appraised value – up to $30,000 in some cases. It’s concerning!
That’s the mechanism which causes markets to rise. Cash contribution. The next person is willing to pay more for the same thing, they outbid, and set a new valuation benchmark, via their price offering.
The problem begins with the surplus of artificial fiat money. There are a lot more dollars floating around, but not as much value in them. When the availability of surplus excess money turns down, then price and value are supposed to adjust in unison downward via price discovery. Due to the artificial mechanisms set in place to install a central control of the markets, price and value may no longer be well aligned through the adjustment process. That is referred to as an artificial pricing prop of the markets. Overvalued markets with consistently high prices.
One could also consider that some measure of market rise is attributed purely to inflationary policy. Which is why it’s confusing to people, they know there must be some permanent rise due to ongoing federal reserve policy of prosperity through debt and target currency devaluation, they can not understand why the effects are so severe, constantly outpacing their actual affordability index, cost of living wage increases.
In the context of this article, the gse’s loose policies causes an even stronger acceleration, one which is unsustainable. We’re left with a situation where people continue to move into the market at artificially high levels,. Then high level of defaults which although managed to some degree with ‘reperforming loan’ type restructuring accommodations, affordability is never in proper alignment with general economic conditions. It just appears there is fair alignment for a short time when the rates dip, people jump back in, qualify and buy, then get immediately outpaced by inflation, with no way out when the rates come back up. In other words, an artificially propped market with excess risk, causing more losses in the future. Why doesn’t the market price structure respond to the losses? Investors zip up the defaults upstream, regular financed buyers and small scale individual investors simply can not compete. That or the lenders hold them in debt traps with loan modifications.
Taxes is but one aspect of this activity, often much easier for most to recognize as it’s straight forward and less complex. There it is, a higher tax fee, hundreds if not thousands a year in higher bills. Such ticks away at peoples affordability. What we’re seeing in some markets now is that no measure of loan restructuring will hold as many people in the system. Unless there is a principal write down, people are walking. When they bought these properties they never expected to to tick out many extra hundreds every month for additional taxes and insurance. The failure of the central control automated approach is they can’t continue to prop markets if nobody is willing to buy, an increasing quantity of people want or need out. There is always a certain portion of persons whom are simply not good money managers, they predictably go into debt. When they’re into mortgage loans, that’s exactly where those whom exploit financial hardship want them to be.
On the back end investors are getting exactly what they want, ready first purchasing access to defaulted property holdings. They’re at the auction block buying up almost everything, except the most recent very high ltv properties. But if the units are ready to go without much needed effort, even the speculators will pay over market for them to hold as long term investments. There is a new game of systematically placing corporate level money, into residential level housing. The centralized automated systems using check and balance exceptions and exemptions make this possible.
Otherwise there would be valid price discovery, markets would deflate much more than they are now, discounted purchase opportunities would be available to citizens through traditional reo asset management listings. Investors would not be drawn to put this much into residential housing because long term collaterization is not there, the risky practices would leave residential as too volatile of a market. If not for the gse’s centralized systems which feed them first purchase opportunities, updated operating policies which hinder fair price discovery.
The money is safe, for investors. The citizens, debt traps for life or walk away and rent instead, because these corporations are not selling very often. They sell to balance their portfolios only when necessary and do not operate in residential housing under similar constraints or market conditions as a regular citizen single family person would. They do not mind renters whom trash properties then are sacked with incredible debt, that’s a beneficial write off set against their primary corporate business interests. They do not care if there is affordability issues, or more defaults, that just means more residential housing opportunity for them. Incrementally, one property at a time to corporate investors, that’s where the available purchase opportunities went, where the ‘generational wealth’ now flows, why there is a building affordability and availability of housing crisis, excessive rent structures, loss of property interest mobility for regular people.
Brought to you by; GSE’s appraisal modernization and lending modernization programs! Now with guaranteed taxpayer backing despite pending privatization! (seeing how this works yet?)
The entire property tax system combined with “unending growth” development planning is a scam. Many countries don’t have property taxes or have very low ones. High property taxes are largely a North American thing. My wife is foreign-born and still owns a condo in her home country – property taxes are $90 a year and that’s really more of some kind registry/title related thing.
Here’s an in depth overview of what is going on and why the rug is getting pulled (and was always going to get pulled):
https://www.strongtowns.org/journal/2020/8/28/the-growth-ponzi-scheme-a-crash-course
And related “PROPERTY TAX: Death of Homeownership & Small Business”:
UAD 3.6 Goodbye Appraisers Judge Hamp makes his prediction for the future
Hamp Thomas does it again. Brilliant. ‘We tried to work with them…”