A Look Back at 2020

Question of the week:  A look back at 2020

Answer: Okay there wasn’t really a question or an answer, but I have a template and you are used to reading the WR&MU with a Q&A as lead so I’m sticking to it.

Because next Friday is Christmas, and the last Friday of 2020, this will be my last full WR&MU of the year. As such, I feel it appropriate to take a look back at the year.

The new year and decade started with conforming interest rate at 3.5% and concerns about economic impact, primarily due to energy costs, with rising tensions between the United States and Iran. We ended 2019 with 3.5% unemployment and nine straight years of the economy adding two million or more jobs to the economy each year. Wages had grown 1.8% in 2019 and inflation 2.1%. For the year GDP grew at a modest 2.3%.

In mid-January the Trump Administration and China agreed to phase one of a trade agreement, slowing the trade and tariff battle that had started in the Spring of 2019.

On Friday January 31st the WR&MU had its first mention of the coronavirus. In the update we mentioned that the news of the virus had pushed Trump’s impeachment trial further down in the news and that investors were worried about the impact of the virus on the Chinese economy and repercussions that could flow through the U.S. economy. The concerns were enough to push the conforming rate to 3.375%.

February the spread of coronavirus reached Europe, towns in Italy were closed (our daughter was travelling there at the time) and uncertainty was the mood in the markets. Uncertainty as to how wide would be the spread of Covid-19 and what it could mean to our economy and markets. At home, the unemployment rate in February was 3.5% and retail sales were moderately strong.  Through the month the conforming rate dropped to 3.125%.

The first week of March investors and the public were surprised by a deep cut by the Federal Reserve of its benchmark interest rate. The move was made as a precautionary move to protect the economy from a severe setback that may (at the time “may” was the view of the Fed) dramatically slow the commerce in the United States. Mortgage rates dropped to 3.00%. Markets were in turmoil and the mortgage industry was seeing lenders raise and lower their rates as much as one-half a percent from day to day as they tried to control the flow of business into their pipelines.

Sunday March 8th was when a singular event broke open the dam and started the flood of actions that saw markets plummet, rates spike and the closing of schools and cancellation of events. On that Sunday talks between the Russians and Saudi Arabia over oil production fall apart and the Saudi’s dropped their price for a barrel of crude. A price war was on and the price for a barrel of oil in the United States dropped over 20%. Investors, concerned for what this meant for the economy, bond markets and jobs absent any concerns of the coronavirus hit the sell buttons and the Dow Jones opened 7% lower than its close on Friday.

We saw consumers panic buying and stores ran out of paper goods, canned goods, meats, rice, noodles and other staples. Slowly, officials around the nation began to impose closings of public places and private businesses.

Investors reacted buy selling everything and holding cash, as a result stock prices continued to fall and rates spiked. Climbing from 3.00% on March 6th to 3.75% two weeks later, despite the Federal Reserve cutting its benchmark rate to 0%.

Not only did the Fed cut rates, it also announced it would be purchasing $700 billion of U.S. treasury notes and mortgages. Known as “quantitative easing”, very prominent during and in the aftermath of the Great Recession, the purchase of interest bearing assets is meant to stabilize those markets, lower rates and create an environment where money can be borrowed cheaply to stimulate the economy.

By the end of the month our “normal” was in place for 2020 with closings of schools, retail outlets, bars and restaurants, and “non-essential” businesses across the country. A small internet company called Zoom saw its stock price double from the beginning of the year to March 26th (as I write this it is up 577% year-to-date).

In the last week of March, the $2 trillion CARES Act was passed in Congress and signed by President Trump that send checks to most tax payers, provided loans to businesses, increased unemployment benefits and send funds to state and local governments. In the legislation were regulations that mortgage lenders had to accommodate borrowers who requested a deferment on their mortgage payments without requiring verification of a Covid-19 related hardship, student loan lenders similarly had to offer payment deferments and payments on government backed student loans were suspended.

As well, the Fed announced it was lifting its $700 billion cap on the purchase of U.S. Treasury debt and mortgages and would buy an unlimited amount to push rates down.

March saw the economy shed 700,000 jobs and the unemployment rate jumped from 3.5% to 4.4%. Retail sales in March dropped 8.7%, mostly due to auto and gasoline sales as people stopped buying large ticket items and commuting stopped.

Most lenders stopped lending on jumbo mortgages in March. Underwriting guidelines tightened in regards to employment verifications and for how self-employed borrowers were analyzed for proof of continuing income.

After rising over 2% in the last quarter of 2019, GDP shrank by 4.8% in the first quarter of 2020.

Conforming mortgage rates fell from 3.875% the prior week to 3.5% to end March; high-balance rates however climbed to 4.5% and we saw a complete disconnect between conforming and high-balance rates as lenders looked to slow the flow of business.

April saw a loss of a staggering 20 million jobs; the unemployment rate went from a 50 year low in February to 14.7% in April. What had initially been announced as a two-to-three-week lockdown on businesses to slow the spread of the virus to flatten the curve of new cases and prevent hospitals from being overrun continued through April and appeared to be in place for a while longer.

The spread between conforming and high-balance rates decreased and April ended with the conforming rate at 3.125% and the high-balance at 3.5%.

Through the rest of the Spring officials allowed more businesses to open and economic activity, job creation increased. An increase in cases after Memorial Day weekend caused some concern about re-imposition of shutdowns, but most of the nation retained the same regulations through the Spring and Summer once businesses were allowed to open. Rates drifted down to as low as 2.625% by early July.

As the economy started to chug along, approximately 10 million jobs were regained through the summer, rates bumped up to a pretty stable level 2.75% into October. The biggest shake up to the mortgage markets was a fee of 0.500 points (one-half of one percent) that the Federal Housing Finance Agency required Fannie Mae and Freddie Mac to impose on all refinances. Originally slated to begin a few weeks after the announcement in September, the fee was moved to December, and lenders began pricing into their refinance rates in October.

As we end the year the nation is experiencing spikes in positive Covid-19 tests and a dramatic increase in hospitalizations. The result has been a return to the shutdowns of March and April and a spike in unemployment as wage earners are once again being laid off. The concern about the economic impact has caused rates to dip from October through December to date.

Throughout the pandemic, real estate sales have been extremely strong. With historically low rates greatly increasing affordability, buyers across the country flooded markets. Whether looking to purchase their first home, buy a home with more space, move to an area with bigger yards, buyers were finding they could move up or move in for near the same housing payments they are currently making. As a result, in many areas, especially California, home prices surged through the year. Which also means equity has greatly increased for those homeowners who remain in their homes, offering opportunities for pulling equity out of their homes to finance remodels, college tuitions or the purchase of second homes or investment properties.

In early February the Mortgage Bankers Association predicted $1.9 trillion in mortgages would be funded in 2020. The latest estimate is that close to $4 trillion mortgages will close in the United States this year.

Looking back through the WR&MU from the first three to four months of the year several thoughts come to mind. First, it seems like a few years ago we were worried about trade wars and possible conflict in the Middle East. Second, while remembering somewhat the day-to-day, week-to-week feelings as we received more news of the coronavirus, started seeing daily infection and death rates. Uncertainty increased, a sneeze or a cough had people looking at you sideways and yourself having a question in your mind, “do I…”

What do you suppose your reaction would have been had I written in the January 3rd WR&MU update:

Through most of 2020 I, and most of you, will be working from home. You may go to your office ten to twelve times after February, if at all. You will be conducting meetings with clients and business associates using the video camera on your laptop or phone, and some meetings will have ten, twenty, seventy or more people actively engaged. Your kids will be using the same program for their classes, you will be using it for yoga, seeing your parents and having happy hours with your friends. For those who wear suits and formal business attire you will see your dry-cleaning bills drop nearly 100% as you may wear a business casual shirt or top, but likely will have on shorts, jeans or pajama bottoms.

This is one of those calendar years where December 19th is the last update of the year, and until January 8th as the next two Fridays are holidays.  

Have a question? Ask me!

Congress faces a deadline of midnight tonight to pass a spending bill for 2021 and a stimulus package. As mentioned a few weeks ago, the biggest sticking points were inclusion in the package of liability protection for businesses, schools, non-profits and other employers (Republicans) and substantial financial relief to state and local governments to offset losses due to decreased tax revenue and increased expenses due to the pandemic (Democrats). Also as mentioned, it appears both sides are willing to set aside their “must haves” in order to pass a stimulus package that likely will include checks directly to tax payers, increase in unemployment benefits, and another round of payroll protection loans. Over-riding the stimulus package negotiations is a federal government shut down if a spending bill is not passed. In years past a short-term funding bill would be passed to cover costs until a full bill could get through the House and Senate, it is looking like no such agreement will occur this year. As this is written the funding deadline is about eight hours away. Knowing that they have wrung out the last amount of political benefit they can get with their bases, and voters in Georgia, the politicos should get both passed before the deadline.

Rates for Friday December 18, 2020: Rates slip from last Friday to reach our lows from four weeks ago.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS: Rates remain flat from last Friday as investors are in a wait-and-see mode for a stimulus deal.

30 year conforming                                         2.375%   Flat

30 year high-balance conforming               2.625%    Flat         

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

As our Jewish friends and neighbors conclude their Hanukkah celebrations this evening, and many others prepare for a Christmas like no other, we find our family and community traditions challenged, or set aside. For the Smith family we will miss our traditional Christmas Eve gathering at Leslie’s sister’s house, where besides the seeing of family members, we also enjoy the most perfectly cooked rib roast year after year.

As well, most year’s Leslie’s mother stays with us Christmas Eve and Christmas nights and is able to enjoy opening presents and dumping out stockings in the morning with monkey bread and coffee. Christmas evening, we usually host dinner with the family and toast each other.

For the past ten years or so, we would leave the Friday or Saturday after Christmas for Scottsdale where the four of us stay for the week, relaxing, playing card games, seeing the Christmas movie releases and just enjoying being together.

With these traditions deferred this year, we look forward to our daughter returning tomorrow from Boston after being there since August and enjoying a quiet holiday season before both girls leave for their respective schools in Boston and New York City in January.

We are very grateful for everyone who entrusted us with their business, their referrals and support in 2020. As we conclude the year we will raise a toast to all and pray for 2021 to bring us back together in person, able to shake hands, hug and clink glasses.

Merry Christmas and Happy New Year, here is 2021 bringing positive change to us all.

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Will my property taxes go up because I refinance?

Question of the week:  Will my property taxes go up because I refinance?

Answer: No. But that does not mean they cannot increase due to action by you, the property owner.

This question has been somewhat frequent this year as millions of homeowners across the country are refinancing for the first time as mortgage rates sank to, and remain at, historic lows. Most recently, friend Shaun asked as we discussed his options for refinancing the loan he used to purchase his home.

In October, when property tax bills were mailed, we covered property taxes and Prop 13 protection in our Weekly Rate & Market Update. Not covered in October is what could make your property taxes increase.

Back to Shaun’s question, will refinancing cause your property taxes to increase. The root of the question is concern by property owners that if the property value is re-evaluated by an appraiser to a value higher, especially significantly higher, than the assessed value that the state will re-assess the property to the higher appraised value and increase the property taxes.

Back to our October WR&MU, Proposition 13 protects property owners from large increases due to increasing property values. With no changes in to the property, Prop 13 limits increases to assessed value to 2% per year; if your assessed value was $400,000 in 2020, the most it can be assessed for in 2021 is $408,000.

Back to the source of the question. You purchased your home for $500,000 in 2013 with a rate of 4%. Today your home is worth $675,000. Per Prop 13, if the assessor maximized the increased in your assessed value each year your assessed value, increasing 2% per year, would be $574,343.

As part of your refinance, you are refinancing your currently $375,000 mortgage and you are obtaining $150,000 in cash to remodel your home. We have the property appraised, and the report values your home at $675,000.

The concern is that because there is an appraisal showing the property is valued at $675,000 the tax assessor will have knowledge of the report and reassess the value from current assessment of almost $575,000 to the appraised value of $675,000, an increase of $100,000, which would increase your property tax bill by $1250 per year, more or less.

First, as mentioned, Prop 13 does not allow an increase above 2% per year. Second, the assessor’s office does not see the appraisal. You can hand the assessor an appraisal for your home of $1.2 million, and your tax bill showing the assessed value is $575,000 and your assessed value will remain $575,000, and next year it will go up 2% to $586,500.

The attentive readers have been waiting to discover how actions on their part will result in their properties taxes increasing.

In our example above we had our borrower accessing $150,000 in equity to finance a home remodel. Depending on what that remodel entails, you might be reassessed and your property taxes will increase.

Prop 13 protects the maximum 2% increase in assessed value from acquisition price except when there is a change in ownership, or new construction on the property.

If the remodel in our example is adding square footage, making a substantial physical alteration of the land (such as adding a pool), making a substantial physical rehabilitation, renovation or modernization of any fixture that makes that fixture equivalent to a new fixture, your property can, and likely will be, reassessed.

How does the assessor know what improvements you have made to your home or property? Permits filed with the local building authority will state what remodel, renovation or home improvements you have undertaken. The assessor’s office reviews all permits when work is completed and make adjustments to your assessed value based on the improvements any additional square footage.

There are home projects that are exempt from reassessment. If you are remodeling or repairing the property as part of cosmetic or normal maintenance the work will not be result in your property being reassessed. For instance, if you replace your roof, install new appliances or replace the toilet and sink in a bathroom, you will not be reassessed.

Other exemptions from having your tax basis reassessed are adding solar panels, seismic retrofitting and if you have to do any rebuilding because of a disaster such as a fire.

Accessory Dwelling Units are being built by many property owners, and the State of California has passed legislation to increase the opportunity for their being built. If you build an ADU on your property, it will impact your property tax basis, but not as much as you may think.

You purchased your property in 2000, your property value is $850,000 and your assessed value is $500,000. You are able to build a 500 square foot ADU that will increase the value of your property to $925,000. The ADU is valued at $75,000. Does your property tax basis increase to the new value of $925,000?

No.

When you add an ADU the state will calculate your property taxes using a blended assessment. A blended assessment is taking your current tax basis and adding to it the value of the improvement. In this case your current basis of $500,000 plus $85,000 for the value of the ADU puts your assessed value at $585,000.

The base property tax for the State of California is 1% of assessed value. Before the ADU was added your annual tax obligation to the state* is $5000, after you add the ADU it is $5850.

*But Dennis, my tax bill is about 1.25% of my assessed value, not 1% The additional 0.25% are taxes and assessments passed by voters, local governments and taxing authorities.

This is the part of the WR&MU where I disclose, I am not a tax expert, an attorney or accountant. If you are concerned about the tax consequences of any improvements or remodeling you are considering please consult with an expert in such matters.

If you have been avoiding refinancing because you are concerned about your property taxes increasing, do not wait any longer. Please call me and we can discuss you options.

Have a question? Ask me!

Covid continues to impact markets from social, economic and political fronts. On the social front, the FDA has cleared a vaccine that Pfizer has co-developed to be authorized, which could happen by the time you read this sentence.. Once approved state and local governments will determine which members of our society are first to be vaccinated. On the economic front, renewed lockdowns have slowed consumer and business activity. On the political front an agreement on a new stimulus package has apparently come down to two points. The Republicans want liability protections for businesses, schools and non-profits to operate without threat of litigation. The Democrats want additional funding for state and local governments to offset costs incurred and tax revenues lost due to the pandemic. Late yesterday Senate Republicans have offered to drop both issues from any bill to get one passed, we’ll see how today and the weekend goes in creating a compromise. As the wrangling continues on Capitol Hill, investors are not pushing markets one way or the other as they wait to see how big the stimulus package will be and who will get what. In the meantime, investors have priced a stimulus package into the markets, failure of a deal to come about before the next Congress, and the Senate run-off elections in Georgia, could/should, see stocks tumble and rate ease further.

Rates for Friday December 11, 2020:

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS: Rates remain flat from last Friday as investors are in a wait-and-see mode for a stimulus deal.

30 year conforming                                         2.50%   Flat

30 year high-balance conforming                   2.75%    Flat         

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Over the past several months I have been commenting, to those who care and listen, that a positive result of the pandemic and people staying at home is an increase in patience, acceptance and tolerant.

There is an awareness that no matter how difficult we find our particular situations, many have it worse. Yes, this has always been true, but most people, including myself, we not as conscious and aware of how relatively fortunate we are. You are not the only one working from home with your dog barking at a squirrel in the middle of your presentation, your internet crashing before you can finish an assignment, or sharing your office with a parakeet, two toddlers, the neighbor’s construction crew’s saws and hammers, and your spouse who often has calls at the same time as you. And these are those fortunate to still have work and employment.

I have noticed the new challenges we face, and share with our neighbors, co-workers, friends and families and stretching around the world, have softened our view of others. Softened our reaction to small mistakes, having to wait, orders not exactly right, tardiness to meetings or calls.

In essence, it appears we are more understanding that others are fallible, as are we; as such we are willing to extend to others the patience, acceptance and tolerance of their imperfections as we wish them to accept ours.

If I am correct, and this is a result of the pandemic, I really hope it lingers well beyond our getting back to “normal.”

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

What does it mean that there are “new loan limits?”

Question of the week:  What does it mean that there are “new loan limits?”

Answer: The Federal Housing Finance Agency (FHFA) was created in 2008 by the Housing and Economic Recovery Act (HERA) in reaction to the housing and mortgage market meltdowns. The FHFA is responsible for the supervision and regulation of Fannie Mae, Freddie Mac and several other entities that are involved in residential lending. Since 2008 the FHFA has also been the conservator of Fannie and Freddie.

Fannie and Freddie, also known at Government Sponsored Entities, or GSEs, purchase the majority of residential mortgages that are funded in the United States, and then sell the mortgages to investors on the secondary market. This flow of funds and mortgages is able to occur on such a large scale because all loans that are sold to the GSEs are underwritten and funded under uniform guidelines and regulations.

Loans purchased by the GSEs are considered “conforming” or “conventional” mortgages because they fit the underwriting guidelines.

Part of the uniform guidelines are maximum loan amounts established by the FHFA for the GSEs for the loan they can purchase. In 2008 to free up fundings for homebuyers and homeowners to purchase or refinance mortgages, thereby helping the recovery of the housing markets, the FHFA created a second-tier of loan limits for GSEs, thereby extending the guidelines for conforming loans to a greater percentage of the housing market.

Conforming mortgages purchase by either of the GSEs are either labelled “conforming” or “high-balance” depending on the loan amount. For 2020 the maximum conforming limit nationwide was $510,400. The high-balance limit is not uniform across the country, and varies from county to county. The highest limit for high cost counties, such as Los Angeles and Orange Counties, for 2020 is $765,400.

Loans that are over $765,400 or do not fit the guidelines of the GSEs are generally labelled as “Jumbo” or “non-conforming” (unless they are VA or FHA—a different question of the week). These non-conforming loans are not sold on the very large and fluid secondary markets of Fannie and Freddie, but are purchased from lenders by large investment companies and banks. Because the risk of the mortgages is not spread across a range of investors the guidelines are generally tighter and harder for qualifying.

Under the HERA act, the FHFA adjusts the conforming, and high-balance conforming, loan limits every November for the upcoming year. The loan limits are adjusted in accordance to the average priced home sale in the United States from October to October; the county by county limits for high-balance loans are set according to the home prices in those areas.

For 2021 the loan limits will be $548,250 for conforming and $822,375 for high-balance mortgages; both increases are 7.4% higher than the 2020 limits.

Many lenders are currently taking applications for the new high-balance mortgages, enabling many borrowers to obtain a conforming mortgage whereas a week or so ago they would have been restricted to a jumbo mortgage.

Have a question? Ask me!

Employment Friday, as it does on the first Friday of every month, the Labor Department released data for the prior month today. The economy added 245,000 jobs in November, the fewest added in single month since the recovery began in May. Economists making guesses as to how many jobs would be added were way off as their consensus was 432,000 new jobs. The biggest factor in the large drop off in new jobs was a drop of about 100,000 government jobs, off-setting the 344,000 private sector jobs created. With the increase in new hires, the unemployment rate dropped from 6.9% to 6.7% in November. A significant factor in the drop in the unemployment rate was 400,000 people dropping out of the labor force due to either stopping to look for work or had to care for a family member who was infected with the coronavirus.

Pressure on Congress to pass another stimulus bill should be rising with the jobs data, adding to pressure of knowing that December’s jobs data will likely show a decline in the labor force as more workers are laid off due to increasingly stronger shut down orders across the country. Typically November and December are strong months for adding jobs due to the number of temporary workers hired for holiday shopping and spending, this year those hires will likely be restricted to on-line retailers and delivery companies.

Overall the news is positive for lower rates as the data portends a slow down in consumer spending and the economy.

Rates for Friday December 4, 2020: Rates bounced of the prior week lows last week ahead of Thanksgiving and have not drifted back down. Yet.(?) Even with the positive but not great jobs data the sentiment is that the economy will have a few more rough patches before it regains a lot of positive momentum as result of a viable and widely available vaccine for Covid-19. This should keep upward pressure off of interest rates through New Year’s and likely into February or March.

Please note rates are for purchase transactions, refinance rates are higher, please call for quotes to meet your situation.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                             2.50%   Flat

30 year high-balance conforming                   2.75%    Flat         

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Our normal Thanksgiving table usually has ten to twelve, thirteen, fourteen people seated and enjoying each other’s company. Before ordering our turkey for our dinner I asked Leslie how big we should get it, knowing it would only by she and I and our youngest daughter. She quickly indicated that we should get the same size bird so we have more leftovers than usual.

Okay then! The result was my prep and cooking for dinner was the same amount for the three of us as it would be for our usual table filled with family members. Our leftovers have lasted the week, with a bit of turkey meat and half a carcass in the freezer for some soup in the near future. Good call Leslie!

I hope you had a wonderful Thanksgiving with whomever and how many others you chose to join in giving thanks.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

What was the result of the ballot initiatives that impacted real estate?

Question of the week:  What was the result of the ballot initiatives that impacted real estate?

Answer: In early October we covered three propositions on the California ballot that if passed would impact property owners in the State. As I write this the final results for elections in California are not yet official. Per California law the results must be certified by the Secretary of State no later than the 38th day after the election, this year that date is December 11th.

That said, the final outcome of the propositions are pretty much decided, absent a flood of uncounted ballots that change the outcomes.

Proposition 15 NO 52%

Proposition 15, if passed, would have split the property tax rolls and stripped the Prop 13 protections form commercial property. The voters’ rejection of this proposition should send a message to elected officials in Sacramento and those who have tried to reverse Prop 13 for several decades. But the message will again be ignored and we can expect the issue to continue to come up on future ballots.

Proposition 19 Yes 51.1%

By passing this proposition voters did make an major adjustment to Prop 13 in restricting the ability of tax-basis to be passed down from one generation to the next. As an example, under the current code, parents can transfer their home to one of their children with a current value of $1 million, but due to Prop 13 their assessed value is $400,000 and the children obtain ownership and their tax basis is the $400,000. Under Prop 19, this direct parent-to-child(ren) transfer can still occur, but it must be the primary residence of the child(ren). This also impacts the transfer of property from grandparents to grandchildren; and generational transfers not only directly but through trusts and inheritance.

Prop 19 also amends Props 60 and 90 that enabled homeowners over the age of 55, those with disabilities, and/or victims of natural disasters, which enabled them to sell their primary residence and transfer their tax basis to the purchase of a new home. Props 60 and 90 limited the transfer to counties to participating counties, Prop 19 enables the portability of the tax base to any county in the state.

As well, instead of only being allowed to transfer their tax base once in their lifetime, Prop 19 allows three transfers. This is a benefit for those who have been through a divorce or widowed.

The increased tax proceeds generated by the Proposition will be split between statewide wildfire response needs and to counties that suffer losses from the passing of Prop 19.

But Dennis, how can Prop 19 generate revenues if it is costing counties money? Great question (thank you). Counties with lower median sales prices were against Prop 19 as they feel, correctly, that many eligible homeowners would be selling homes in higher cost counties and buying in lower cost counties. Consider the retired couple who sell their home in Palos Verdes for $1.2 million, with an assessed value of $400,000, and purchase in a new home in Palm Desert for $600,000. Riverside County will be collecting taxes based on the $400,000 tax base that is being transferred from Los Angeles County. Los Angeles County will be collecting taxes on a basis of the $1.2 million sales price of the home in Palos Verdes.

Riverside loses the taxes on the $200,000 difference between the sales price basis and the transferred basis on the home. LA County gains on the extra $600,000 in tax basis between the seller’s prior basis and the buyer’s new basis. As you can see, LA County, and the state by the way, benefits greatly from the transfer, and some of that benefit will accrue to Riverside County.

Proposition 21 No 59.9%

Proposition 21 would have fundamentally changed the rental housing markets in the state as it would have given much greater leniency to local governments to enact rent-control on residential units. Time after time, election after election, residents in local and statewide elections have rejected rent control, knowing it is a short-term panacea to rental costs and only benefits those renting at the time the laws are passed. Low-cost housing advocates, and their allies in government, will continue to push rent control as the solution to growing populations of homeless persons and adding affordable housing to markets.

It is very likely that the 2022 statewide ballot will have propositions that are identical, or extremely similar to failed Props 15 and 21.

Have a question? Ask me!

Retail sales continue to increase, but at a much slower rate. Sales were up 0.3% in October, well below September’s large 1.6% spike in sales, and the lowest monthly increase since May. The increase in sales were driven by higher ticket items, such as vehicles, electronics and home-improvement. It should be no surprise the on-line purchases continue to be driver of retail purchases, growing over 3% from September. The slow down in the growth is being attributed to rise in positive tests for the Covid-19 virus in October. While this is an obvious cause for a decline, I feel another factor contributing to the slower growth is the tremendous spike in September sales. Historically, when there is a very sharp increase in a month in consumer spending or retail sales it is followed by a much smaller increase due to consumers taking a break from big ticket and splurge purchases the month before. Yes, the virus is a factor, but don’t discount the prior-month factor. Regardless of the cause, the news is positive for rates to remain low as the data could portend a slowdown in the economy.

Rates for Friday November 20, 2020: I give up…trying to predict rates and the actions of investors. Primarily how low rates can go. I have said for many months that there is little room for rates to go lower, yet over the last three weeks, after seven weeks of stability, rates have done just that. I underrated how money would flow into stocks and equities based on the pending availability of a vaccine would not choke out investments in bonds and mortgages. Reasonably, the expectation should be for economic growth, higher company revenues and profits, and also higher rates. However, funds are flowing out of cash and into both stocks and fixed rates causing stock markets to continue to grow and rates to fall. For how long?

Please note rates are for purchase transactions, refinance rates are higher, please call for quotes to meet your situation.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                                   2.375%   Down 0.125%

30 year high-balance conforming                   2.625%    Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

It appears Californians have come together with a common cause—lambasting our Governor over his incredibly poor decision to attend a dinner party that violated the standards he has been touting to the state’s residents. The ignorance of the optics, or the arrogance of perceived impregnability to criticism for his actions, is baffling. If Governor Newsome was aware that his attending a dinner party may cause some rumblings, he completely missed the possibility that he would do something that hasn’t occurred in this state in sometime, unifying residents from across the political spectrum in heaping criticism and calls of hypocrisy on his reputation. Well done Governor, now what will be your next, and hopefully more globally beneficial, act that will keep this newfound coalition together? Suggestions welcome.

Whether you intend to abide by the Governor’s guidelines of limiting the number of guests and households in attendance and keeping your gatherings to less than two-hours, or intend to “French Laundry” your gatherings, Leslie and I wish you all a very happy and joyous Thanksgiving.

As for us, as every year, we are very thankful for those who support our business by trusting us to work with you on your transactions and referring your family, friends and co-workers.

That said, none of this works without the incredible team at Stratis Financial who support us and our clients with their diligence, hard work, experience and constant positive attitudes. Our staff is as good as any in the industry, which has proven to be true in this year of historic challenges.

Thank you everyone for your support and confidence.

Happy Thanksgiving,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

What impact will the vaccine have on the housing market?

Question of the week:  How does a vaccine impact the housing market?

Answer: Last week’s Question of the Week was “Now What,” and we discussed the possible impact of the national elections on interest rates and markets. As I told real estate networking group in a presentation on Wednesday, all the predictions about the impact on markets as a result of the election go below the fold, so to speak, with the announcement by Pfizer on Monday that it has developed a vaccine for the Covid-19 coronavirus that they is testing at 90% effective.

Political impact on markets is typically long-term as it takes time for legislative and administrative policies and regulations to be enacted. Of course, there is a more immediate impact on prices of investments as investors react based on what they anticipate the impact of said policies and regulations. The actual impact takes time to wind through the bureaucratic processes of hearings, committees and arguments.

Social impact on markets is can be long-, medium- or short- term, though much faster today due to the ability to spread information and opinions quickly through social media and other electronic media. Most social impact on the economy comes through boycotts* and actions to raise attention to an issue. The economic impact can be somewhat isolated to a particular segment of the economy, or region. There have been many famous boycotts in our nation’s history that had political, social and economic impact. Two that immediately come to mind are the boycott of British goods prior to the Declaration of Independence and Revolutionary War, and the Montgomery Bus boycott.

Economic impact on markets can also be from short- to long-term, but are usually very quick. Consider the economic impact of the economic event of mortgage company in Irvine, New Century, not being able to sell its subprime mortgages to investors in February 2007. Within days investors stopped purchasing mortgages from other subprime lenders and the dominos started quickly falling. Within a short period of time housing markets across the country started shedding value, homeowners stopped making mortgage payments and our nation dropped into a deep recession that lasted from the 4th Quarter 2007 through the 2nd Quarter of 2009.

Other economic impact scenarios that had quick impact are the OPEC Oil Embargo in 1973 and the dotcom bubble burst in 2000. The former led to high inflation and interest rates, the latter the collapse of many companies, a sharp increase in unemployment in the tech industries, a tremendous loss of wealth (estimated at almost $7 trillion) for investors, and consolidation in the technology sector. It should be noted, technically the OPEC Oil Embargo was a political impact as the Arab members of OPEC were reacting to President Nixon asking Congress for several billion dollars for Israel to assist them in the Yom Kippur War.

Dennis, enough history, what about today and the future?

When state and local governments mandated shutdowns for many sectors of the economy the impact was a loss of over twenty-two million jobs. The economy has slowly been rebounding, and through October a little over twelve million jobs have been recovered. However, service industries such as hospitality, tourism and retail still bear the brunt of national unemployment. With the virus surging in many areas of the country, government officials are considering, or have already considered and implemented, reinstituting shutdowns of bars, restaurants, retail stores and other sectors of the economy. Such actions, of course, will result in more layoffs, permanent closing of businesses and a rebound to the rebound as the economy slows down.

Pfizer’s announcement this week of its new drug and its efficacy in trials has already had an economic impact as investors, looking into the future, pushed equity prices (stocks) and interest rates higher. Why?

Because most investors are not investing for today, or tomorrow, but for next month, next quarter and next year. While the increasing positive tests will likely result in shut downs throughout the nation, and resulting decline in economic activity, the strong possibility of a vaccine that will be available by, or before, the spring has investors reacting to higher employment and consumer spending.

Consider a quarter, half, almost all of our population being inoculated, and it being effective for 90% of those taking the vaccine. This will enable millions to go back to work. Very importantly it will enable schools to open, allowing parents to go back to their jobs.

An effective vaccine will lead to a boom in employment, a boom in consumer spending, a boom in the economy, and likely a rise in prices.

A vaccine will not just be a major boost to the American economy, but economies around the world.

Rates move up when the economy is growing, or expected to grow; and down when the economy is slowing, or expected to slow. With the expectatioin of “normal” returning to the economy, upward pressure is being put on interest rates. If prices increase and inflation pushes past 2%, I’ll say when, the Fed will start looking at increasing its benchmark interest rate.

Looking ahead, absent any major political events, policies, regulations that might disrupt the expectation of investors and consumers, a widely available and utilized vaccine will push the economy into strong growth, which will result in higher interest rates.

We have seen the impact that the historically low rates have had on the housing markets. Despite the pandemic and tends of millions being out of work, home sales were up from July, August and September 2019 by 8.7%, 10/1% and a whopping 20.9% respectively. Tens of millions unemployed, economy’s future somewhat questionable and sales boom. Why? Rates enabling 15-20% more buying power for home seekers.

Should my thoughts on rates increasing come to pass, the increase in home sales and prices will very likely slow. Will they decline? Unlikely in most areas of the nation, but in some of the very upper end markets there could be a lack of buyers that could soften prices and sales.

I for one will gladly trade rates going back up to 4-4.5% in exchange for the vast majority of our nation being vaccinated and our communities getting back as close to our previous normal as possible.

*Ever curious, I looked up the origin of the word “boycott.” Charles Cunningham Boycott put his name into our nomenclature with his actions in 1880.

Have a question? Ask me!

Rates for Friday November 13, 2020: Rates spiked higher early in the week on the Pfizer announcement, and three days of auctions of debt by the Treasury. The market turned slowly the last few days and we end the week level with last week’s rates.

Please note rates are for purchase transactions, refinance rates are higher, please call for quotes to meet your situation.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                                     2.50%   Flat

30 year high-balance conforming                      2.75%    Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Lots of thoughts this week for the final segment of the WR&MU, which I know is the only section many of you read (voyeurs! 😊). It’s the first Friday the 13th since March, and how did that go? This week was my triennial purchase of a new laptop, which means days of installing programs and transferring data. And Alex Trebek.

Several years ago, perhaps fifteen or more, for my birthday Leslie signed me up to tryout for Jeopardy! Like many, I kill it at home, answering questions from the comfy confines of my couch, perhaps with a beverage at hand. Leslie thought, hey why not try it?

I drove up to the Sony Studio complex and the group I was trying out with were led to the Jeopardy! set and seated in the audience section. Yes, it was very cool to see the set with Alex’s podium and those of the contestants.  Above the audience are two screens where the questions are projected for the audience as they are for home viewers.

One of the show’s crew told us we were going to be given a series of questions, all $1000 questions or higher, and a few seconds to record our answers. The answers are collected and graded and those who score over a certain percentage are then retained and put through the next stages, which include on stage, testing for energy, etc.

I did not make the cut. The questions did not have categories, which helps frame answers, there is a 10-15 second time frame to answer, and the pressure was intense. When all the scores were announced those of us who missed the cut were gathered together and escorted back through the sound stages, which were very neat to see.

As we were walking out a group was walking towards us. Our guide said, this group is going to tryout for Wheel of Fortune. As we passed by each other I heard someone from the WoF group say, “those are the smart people, they tried out for Jeopardy!”

To which I replied loud enough for all to hear, “Not that smart…you should see the ones still in studio.” A few of those in my losers group took some offense to that comment. Not sure why.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Now what?

Question of the week:  Now what?

Answer: This is the same question of the week for the Weekly Rate & Market Update on November 11, 2016. The biggest difference between the Friday after the national election in 2016 and 2020 is the outcome was known.

There are many different answers to “now what,” I will try to stay true to the purpose of the WR&MU and answer within the framework of mortgage rates and related markets.

An economic primer. Investors control mortgage rates. Investors control financial markets, stocks, bonds, and other financial instruments. Investors actions are based on how they answer our question, “what next.” Quite simply, investors are placing bets with their money as to what they think will happen in the future based on all the information they have available filtered through past experiences and, very importantly, how they feel other investors will react.

If DCS Investor Inc thinks market X will drop based on events and data and sells off in market X, but the overwhelming majority of their competitors think market X will rise, then DCS Investor Inc will have sold off investments that subsequently became more valuable as prices rise based on most investors purchasing assets in market X.

Now what? For mortgage rates, now what?

Two things investors do not like, uncertainty and “dead money.” Uncertainty disassembles the decision making process. Decision makers do not know which of their models and inputs to those models to use. But, because of their dislike of “dead money,” they feel the need to do something.

Dead money is cash. Funds sitting in a bank account earning 0.50% when invested it could make significantly more.  However, in times of uncertainty investors park their funds in cash, the investing theory being that not losing money is better than making money.

The alternative to cash in times of uncertainty is fixed return assets. Fixed return assets are those where your return on investment is declared, instruments like bonds and mortgages. When the road ahead looks rocky and uncertain, investors will engage in what is called a “flight to safety.” Selling the seemingly unsafe investments in stocks and investing in the safety of a fairly certain and known return provided by fixed rate assets.

Tuesday evening, as people worldwide were watching news casts, or constantly hitting refresh on internet browsers, investors were making their bets in the futures markets* as to how they thought others would react based on the news of who would win the elections**. Through Tuesday night and into Wednesday the futures market spiked and then dropped as different scenarios played out and created expectations of future events that could impact markets.  Uncertainty was, predictably, causing some havoc.

*Futures markets are investments that are based on what you think will be the value a stock index, such as the Dow Jones Industrial Average, will be at a future date. Using the DJIA an example, the dates used are the last trading day of each quarter.

**While the top of the ticket gets sucks up almost all the headlines, news reports and social media posts, investors were also reacting to the returns and speculation of the results of elections for the Senate. If the Republicans retain the majority in the Senate, they can put a damper on any legislation and initiatives put forth by a Democratic administration. If the Democrats flip the Senate and win the White House there is no political road block to legislation and initiatives. Similarly, if the Republican retain the White House and Senate, the House will still have a Democratic majority that can dampen any legislation and initiatives.

What we have seen since Tuesday is investors getting rid of dead money and investing in both fixed assets and equities, with the prices for both climbing from Monday’s close of markets. Will this trend continue?

The markets are reacting to a) what they are expecting election outcomes to be and b) based on those expectations, what they expect to come out of Washington D.C. Primarily, how much money will, or will not, be pumped into the economy through another round of stimulus funds. As well, longer term, how might fiscal policy change that will impact the economy and businesses.

The biggest factor, in my opinion, is if the results of the elections give Democrats control of the White House and Senate to go with their majority in the House. This will likely result in a very large stimulus package getting passed very quickly. If there is a split between the White House and Senate, any stimulus package will be considerably less, if any is able to be passed at all as the House and Senate debate what is considered stimulus, what is considered policy, and how much of either should be included in any bill.

The second biggest factor is also dependent on the composite of party control, taxes. If the Democrats have control of the legislative and executive branches the expectation is that some, a lot, all, of the revisions made to the tax code in 2016 will be reversed and additional items added that could increase taxes for different segments of the tax base. Should this occur expect investors to react based on estimates of who will benefit or be harmed by the changes and what those segments contribute to the overall economy.

What next? For the short-term, more uncertainty until all the ballots are counted, any court filings are adjudicated, and results are final. This should lead to rates staying very low as investors prefer the safety of a fixed return to the dead money of no return.

What next? For the long-term, rates will stay low into 2021 regardless of the election outcomes as the economy still has a long way to go to return to pre-Covid activity. Impeding the rebound will be any actions taken by local, state and possibly the federal government to close down segments of the economy should the C-19 virus spread wider and faster as winter hits.

What next? For housing and mortgage markets will depend on the overall health of the economy, and most importantly the financial health of the middle-class, who make up the vast majority of the home buying market.

As you are likely aware, housing prices have soared during the pandemic, despite over 10 million people still being out of work compared to February. The vast majority of those out of work are entry level and lower-tiered salaried workers in the economy; i.e. those who would not be buying homes even in a booming, full-employment economy. For the most part the middle-class has been relatively untouched financially by Covid. Being able to work at home, even if infected but functioning with the virus, has enabled tens of millions to work and maintain their incomes. Exactly what is required for a healthy housing market.

As long as the middle-class is able to maintain stable incomes our housing markets should be stable.

Have a question? Ask me!

Politics certainly impact rates, but not as much as economic data. As is customary on the first Friday of every month, the Labor Department released data employment data for October this morning. The news is positive for the economy, and, if sustainable, for the rebound to continue. Almost 640,000 jobs were added to the economy last month, most in service industries, including retail, leisure and hospitality. The unemployment rate dropped to 6.9%. The underlying strong point in the data was the addition of 906,000 jobs in the private sector. Since private sector jobs add more to the economy than government sector jobs, this is very favorable news for growth. In ordinary times this news would put a lot of upward pressure on interest rates. In these times, and this week in particular with the unknown political outcomes, the news had some impact, but very muted.

Rates for Friday November 6, 2020: With Mortgage Backed Security prices spiking this week, we say a dip in rates mid-week that peaked and appear to be falling as trading for the week nears. The Treasury Department announced earlier in the week it would not be borrowing as much as expected. The reduced supply from the government should keep rates low as those looking for fixed assets in their portfolios bid up prices (higher prices means lower rates). My advice, as it almost always is, if you have a rate that works for you lock it through your closing period. Rates go up a lot faster than they go down, any incremental savings you may achieve with rates dipping are quickly lost if you guessed wrong.

Please note rates are for purchase transactions, refinance rates are higher, please call for quotes to meet your situation.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                              2.625%   Flat

30 year high-balance conforming                      2.875%    Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Growing up in a somewhat politically active household, multi-generational on my mom’s side, having a degree in Economics and Political Studies, and a keen interest in what is happening in City Halls and Capitols, it surprises many of my friends and acquaintances that I rarely watch any news, speeches or debates. This includes channel surfing on election night.

Many years ago, sometime during George W. Bush’s first term, I quit watching speeches, then pulled back on watching or listening to the news or political commentary, talk-shows etc. Why? Because I grew too tired of the theater blocking the substance. For State of the Union, or other major speeches, debates and announcements, I find texts of the speeches or comments and read what was said. No superfluous adjectives or adverbs but reporters or commentators trying to color what was said, or hinting at some unsaid intent. No inflection or reaction. Just what the individual said.

I then will read through reports from several media and opinion sites, from across the spectrum, to get the perspective from different views and see what will be driving the news cycles. In essence my consumption of news and events is rarely visual or auditory, and almost solely from reading. As well, it is a consumption from those with whom I tend to agree and disagree in order to understand how others assimilate actions, events and words.

If I had a mandate I could impose on users of social media it would be this, follow those with whom you disagree with as much, or possibly more, than those with whom you do agree. Expand perspectives, expand understanding and there is a greater likeliness of more people have friendly conversations over major, and minor, issues. I don’t need anyone to agree with me, all I ask is to try to understand my position, and respect our relationship enough to disagree with civility.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

Should we use some of our retirement funds for buying our new home?

Question of the week:  Should we use some of our retirement funds for buying our new home?

Answer: This is a recurring question that we cover every few years in the WR&MU. With home prices rising and rates at historic lows, many families are looking to purchase homes, but are in need of more funds for closing than they may have saved. At least saved in traditional savings accounts; but when they look at their employer sponsored retirement account, i.e. a 401(k) account, or other retirement account such as a rollover or SEP IRA they see they have funds that could make a home purchase possible.

First, I am not an accountant, CPA or tax advisor, it is recommended you consult with one before entering any transaction that may have tax ramifications for you in the short or long terms. That said, the IRS website also has a lot of information on retirement funds and their use for purchasing homes.

Most contributions to retirement accounts are made pre-tax, meaning the amount you contribute to your retirement account is not counted as taxable income. Because of this, when you withdraw funds from an account to which pre-tax contributions the amount you withdraw is taxed as ordinary income. For instance, if you access $25,000 from your IRA that amount will be added to your other income for that year when calculating the amount of money you owe for federal and state income taxes.

Note that if you are under 59 ½ when you withdraw the funds there will also be a 10% penalty for early withdrawal from the account.

However, the IRS allows individuals under 59 ½ to withdraw up to $10,000 in their lifetime for the purchase of their first home (defined by the IRS as “no present interest in a main home during the two-year period ending on the date of the acquisition of the home which the distribution is being used to buy, build, or rebuild.” In short if you are closing escrow today, October 30, 2020 and you sold your prior home on October 29, 2018, the IRS considers you a first-time home buyer.

If you are under 59 ½ and take $10,000 out of your IRA to purchase your first home you will still be taxed on the amount as ordinary income. If are married and your spouse has an IRA, s/he can also take out up to $10,000 for the purchase without penalty, provide s/he also qualifies as a first-time buyer.

Another option for using retirement funds for purchasing a home is as a “bridge” between the purchase of your new home and the sale of your existing home. This option has some risk which I will detail below.

Here is the scenario. You are purchasing a new home for $700,000 and want a loan for $490,000, which requires $210,000 down payment. You currently have $150,000 in savings and investments you can use for the down payment, the balance of the funds for closing are going to come from the sale of your existing home. After your home sells you are expecting to net approximately $150,000.

The two transactions are supposed to close simultaneously, so the proceeds from your sale will be transferred to the escrow account on your purchase transaction. A few weeks into your sale transaction an issue comes up with the buyer that will prevent them from obtaining loan approval, such as losing their job. You had several offers on your home and another buyer is able to open escrow right away but will not be able to close until twenty to twenty-five days after the escrow on your new home is supposed to close. The couple selling you their home have also purchased another home and need to close on time.

In a rollover-IRA from previous job, you have $200,000. The IRS regulations pull funds from a qualified retirement account and pay no taxes or penalties as long as all the funds withdrawn are placed back in the account within 60 days.

Because of this regulation, you pull $60,000 out of your retirement account and close the escrow on your new home. Twenty-five days later the escrow closes on the home you are selling, you receive proceeds of $150,000 and deposit $60,000 back into your retirement account.

There is a big risk in this type of transaction. That risk is the 60-day limit. What if the new buyer of your home also has issues and cannot close? You get another buyer but by the time the home closes and you get your funds your deposit is in the account 62 days after you made your withdrawal? If this happens then the $60,000 is taxes as ordinary income, and if you are under 59 ½ there is the added 10% penalty. Keep in mind, that this $60,000 may put you in a higher tax bracket so the funds may be taxed at a higher rate than you would other wise pay.

If you are considering this tactic for your real estate transaction you need to make very sure that you will be able to meet the 60-day time frame for re-depositing funds.

The most common use of retirement funds for purchasing a home is accessing funds from an employer sponsored 401(k) or 403(b) retirement program (moving forward I will just use 401(k) and it will represent both account types). One option is to withdraw the funds you want to use for you home purchase. If you do this, as with withdrawals described above, you will be subject to income taxes on the funds, and possibly a 10% early withdrawal penalty.

Most homebuyers who are using funds from their 401(k) accounts to purchase a home borrow the funds from their account. Almost all such accounts allow employees to borrow from their accounts for medical, educational or home purchase needs. The maximum amount that can be borrowed is either 50% of the balance in the account or $50,000, which ever is lower.

Different plans have different rules and policies for borrowing funds, and for how the funds will be repaid. Typically, the minimum loan period is 5-years, although for home purchases many plans will enable a longer repayment period, some up to 30-years.

If you are going to borrow from your 401(k) to purchase your new home you must be aware that there is some tax risk involved. If you have failed to repay the loan before your employment is terminated, either voluntarily or involuntarily, then the amount remaining on the loan is taxed as ordinary income, and if you were under 59 ½ when you accessed the funds the 10% penalty will apply. The same may hold true if you company is acquired by another company and your 401(k) is transferred to the new employer’s retirement plan.

If you do borrow from your 401(k) the loan repayment is automatically deducted from your pay each pay period. Note that the repayment amount is after taxes, meaning you pay taxes on the amount of the loan payments; it is the same as if you receive your net pay and then write a check to pay the 401(k) loan payment.

The primary argument made against borrowing from your 401(k) for the purchase of a home is that when you take the loan the funds come out of the investments in your account, therefore you lose the growth those funds would receive as the markets grow. This is true, if you borrow $25,000 to purchase your new home and over the next five years it takes you to repay the loan the market has increased 7%, you will have missed out on $1750 in growth. However….

Like all loans, the 401(k) loan has interest that you must pay. There are different rate structures from plan to plan, but they fall into two categories, a rate tied to the Prime rate, so it adjusts when the Prime rate changes, or a fixed rate of return. Let’s say your plan has a fixed rate on your 401(k) loan of 4%. That 4% interest you pay is to yourself. So, if you have a 5 year repayment you will pay yourself $27,625, a gain of $2,625. Even if the market grows at a much higher rate over time, you are still making a return on the funds you borrowed and putting them into your retirement account.

Every situation and circumstance is different and when considering utilizing retirement funds to purchase a home there are many factors to consider. Among these factors is how strong is your retirement planning and accounting? Are you making, and will you continue to make, contributions to your retirement accounts? How close are you to retirement? Are you anticipating your income to increase in the future so you can increase your contributions to your retirement accounts, if so for how long?

As a rule, I am more opposed to a straight withdrawal of funds for the purchase of your new home than I borrowing funds from your retirement accounts, primarily due to the tax implications and the return you will pay into your account if you borrow the funds.

Many advisors are against considering using retirement accounts for a home purchase, even with the use of a loan, as they are laser-focused on how much money you will have available when your retire, and taking funds out of an account can decrease the amount of funds to pay for your needs in retirement.

The biggest factor I see in leveraging your retirement accounts for the purchase of your new home is you have the ability to fix the cost of your housing for a long time. The biggest expense most of us will have in retirement will be housing, unless our home is free and clear of any mortgages. If you are renting not only will you always have a relatively high expense compared to other needs, but it will be increasing through the years.

When you purchase your home you have many, many long term advantages. You fix your main housing cost, exceptions being taxes, insurance, etc. You build equity, often faster than any returns in investment markets. In the future with the equity you have built you can sell and down size to a smaller home and lower, or eliminate, your mortgage expense. Or perhaps you have enough equity to be able to obtain a reverse mortgage which can eliminate a mortgage payment and possibly provide a monthly payment to pay for other necessities.

Most Americans will retire with inadequate funds in retirement accounts to supplement whatever assistance may be available to them through social security or other retirement payments from pensions. Those who own homes will be far better off than those who do not. Those who own homes and have funds in retirements accounts will fair even better.

The decision to access retirement funds to purchase a home need not be an “either-or” decision, but if it is, depending on where you are in life, my preference is home ownership.

If you are considering purchasing a home and want to discuss the options you have available please contact me.

Have a question? Ask me!

Lots of economic news this week. Let’s start with the big headline, the economy grew at a rate of 33.1% in the 3rd quarter after shrinking 31.4% in the second quarter. A lot of the growth was a result of the trillions of dollars shoved into the economy from Washington in the form of direct payments to tax payers, increased payments for unemployed workers and PPP loans to businesses. This enable consumer spending to continue and help reverse the economic crash in the spring. Technically, the increase in GDP in the 3rd quarter after negative GDP in the first two quarters ended the recession (defined as two consecutive quarters, or more, of negative GDP). Realistically, we are not out of the economic slump woods.

Also reported this week, were continued increases in personal incomes, up 0.9%, and consumer spending, up 1.4%, in September from August. With the elimination of the unemployment supplement in August, the increase in income and spending is a bit of a surprise.

Rates for Friday October 30, 2020: Markets continue to bounce around on political news, expectations for more stimulus and most importantly expectations for the economy. The GDP and other economic news was shrugged off by investors in mortgage and bonds, normally the news this week would push rates higher, as the anticipation is increasing cases of Covid-19 as we move into winter and the unknown aspects of how impactful that will be on hospitals and workers. The yields for those purchasing Mortgage Backed Securities are lower than they have ever been, below 2%, which is barely above inflation, except the funds are locked in for thirty years and inflation is not.

Please note rates are for purchase transactions, refinance rates are higher, please call for quotes to meet your situation.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                         2.625%   Flat

30 year high-balance conforming                2.875%    Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

It’s the kids. It’s the kids I feel the saddest for through the pandemic. Missing school, missing friends on playgrounds, or in many cases at each other’s homes. No recess, sports leagues, dance classes or letting grandma spoil them with a quick milkshake run on Saturday.

Today they should be having Halloween parades through the classrooms of their schools in their clever costumes. Tomorrow they should be ringing our doorbells as Princesses, Intergalactic Heroes, cartoon characters or scary monsters.

As much as they like the candy, many of the kids just like being noticed for their costumes, especially if homemade. I always get more smiles for complimenting Cinderella on how beautiful she is, or feigning concern at how scare the Zombie is, than the ubiquitous tossing of some candy into their bag or plastic pumpkin.

When we have a viable vaccine, my vote is that we give it to school kids and in-school personnel first. Let them get back in all the classrooms, let them learn, play and grow mentally and socially as soon as possible.

Happy Halloween, I hope you are able to work something out in your neighborhood so the little ones feel special.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

What are your tips for making our new home search easier?

Question of the week:  What are your tips for making our search for a new home easier?

Answer: This week’s question of the week is a bit of a reprise from last October. However, given the current conditions with a scarcity of homes on the market creating an unbalanced market I think it is worth repeating. Our home buying clients are in multiple-offer situations and to be successful they are often offering over the seller’s initial asking price. Here are the tips I provided last year, with some additions below for the current market.

The first thing I tell new clients is to remember a few things. First, when meeting with mortgage professional(s), real estate agent(s) or other service providers, you are conducting job interviews. You will be working with these people for quite a while, if you’re very lucky in finding the right home right away, are fully qualified, you are looking at a month minimum. The home buying process is somewhat emotional and you want to work with people you have confidence in their ability, are experienced and that you trust.

Either the first or second step was being taken care of, they were meeting with a mortgage professional. Being that they are first time buyers, our initial meeting was about an hour. We covered how mortgages work, the process once they have an accepted offer and the relationship between price, down payment, mortgage amount, rates and costs for closing. Then we got into their financial details to determine a purchase price range and subsequent funds needed for closing and their monthly housing payment.

With this information exchange, they were comfortable with the financial aspects of their purchase and we are able to generate a pre-approval package to accompany their offer when they find the right home. My objective is that when you are looking at homes in the price range we discussed you are focused on the properties and their plusses and minuses and not wondering if you can afford the homes you are considering.

If meeting with a mortgage professional is not the first step, the first step should be to meet with a licensed real estate professional. If you have not been pre-approved, or spoken to a mortgage professional to determine a price for which you can qualify, I advise that the initial meeting with an agent is to get to know one another. As mentioned, this is a job interview. Ask how they like to work with buyers, what is their process, when are they available to show you properties. If you have already met with a mortgage professional, let them know and provide contact information. If you have not met with me yet, please tell them that you have a mortgage guy with over thirty years in the industry and you will be meeting before you start looking at homes—unless you are out of state in which case I, unfortunately, cannot assist you.

Until you know how much of a home you can afford, an amount verified by a mortgage professional, do not start looking at homes. Most experienced agents will not start showing new potential clients homes until they hear from a lender letting the agent know they are qualified, any potential issues being addressed and how much the buyers can afford.

The obvious concern is you do not want to look at homes for $750,000 and find out you can qualify for a $650,000 home. However, we also have worked with many clients who were looking at homes with prices significantly lower than what they can afford. They made assumptions of what they can afford, or used simple on-line calculators, and after our discussions with them and educating them on the process and how we determine affordability adjust their sights a bit higher.

The next step I strongly suggest for home buyers before starting to look for property is a Must Have/Can’t Have list. If you are buying with your spouse or significant other, I advise that you each be very selfish. Go into separate rooms and make a list of the three things, or less, that your home must have. Then make a list of three things, or less, that if a home has this feature you absolutely will not buy it. Then compare lists.

If there is something on your “can’t have” that is on your spouse’s “must have” list then you need to have a conversation because one of you might not be happy living in a home that either has that feature or does not.

Ideally, your lists are compatible and reasonable. When my wife and I were looking to purchase our current home 20 years ago her only “must have” was a formal dining room. I didn’t have a “must have” and my only “can’t have” was a rock roof.

Regarding the Can’t Have, I have had agents express to me, “I’ve shown them fifteen houses that are exactly what they say they want and they won’t write and offer.” I ask, “have you asked them what the home can’t have?” Knowing what that may be usually solves the problem, as the Can’t Have for some can be more important than the Must Have. Make sure you let your agent know any features that will stop you from buying a home, it will make your search easier. As well, if an agent continues to show you homes with features that you have expressed are deal killers you may want to look for another agent.

Once you have your list give it to your real estate agent. With your list, knowing the price range for which you qualify and the area where you would like to live, your agent should be able to show you homes that are on the market the meet your criteria, or most of it.

This is important—listen to your agent. If your needs list, amount for which you qualify and area where you wish to purchase do not match, then you need to make some changes in your expectations. Every agent has the story of clients who wanted what was impossible, essentially a $800,000 home with a $500,000 budget. The clients go from agent to agent to agent being told, “that is not possible,” but refuse to listen. These types of clients are still looking, only the house they could have bought for $500,000 a few years ago now costs $575,000.

Finally, on the home search, there is no perfect home. I have had clients have custom homes built and after they moved in there were features they wish they had added, not put in or built differently. Your objective is to get as close to your list as you can, but you may need to make a few concessions.

Once you are all on the same page be ready to buy. Your agent knows what you want, s/he knows what you can afford and has been monitoring the market, and making calls to past clients, for the home you want to buy. If s/he calls you on Tuesday and says, “I found it and it went on the market today..” go see it that day or evening and do not be afraid to write your offer!

For the current market, be ready to pay more than the seller is asking for, how can you do this? When I am going through your pre-qualification and pre-approval numbers with clients and arrive at a price point that works for the buyers, I start some scenarios. What if the home for listed for $600,000 will need $615,000 to buy it, here are some options, are you comfortable? What if we are in escrow for $615,000 and the appraisal comes in at $600,000, here are the possible options, are you ready to come in with more cash? (Here is WR&MU with the answer to “what if the appraisal is lower than sales price?”)

One final point, this process is about you. You will be getting advice from a lot of people, some involved in the transaction, such are your agent and me (ideally); some not involved, such are you co-worker or cousin Linda. I tell clients to always remember they are in control, they make the decisions and everyone else reacts to those decisions, and that three things are true, at least when it comes to me and likely everyone else: 1) I am not spending any of my savings to buy your home 2) I am not going to dedicate any of my income to make your monthly payment 3) I am not going to live in your home. All advice you get goes through that filter—you are buying the home, paying for the home and living in the home, your opinion is the one that matters most.

Working with homebuyers to set up their purchase transaction and work with them through our closing of escrow to become homeowners is something myself, and our company, excel at, as thousands of homeowners in California can attest. We do not just punch numbers and say, “this is how much you can buy.” We work closely with our clients to ensure they understand the transaction, are comfortable with the financial aspect of the purchase and have all their questions and concerns addressed.

In the current market you need to be prepared and comfortable with many different options and scenarios as you are competing with many others who want to buy a home. This is where seasoned professionals are valuable to you as a buyer and to the agents in the transaction, providing advice and options based on experience doing thousands of purchase transactions and having faced many different challenges successfully. Over the last several months we have had many clients come to us that were working with other lenders who were unable to structure financing in such a way that worked for the clients and enabled them to be competitive in their offers. Primarily because they were unable to properly explain the options available and how they would impact the clients so they were more comfortable with their decisions.

If you know someone considering a home purchase in the near, or even distant, future please have them call me.

Happy home hunting!

Have a question? Ask me!

Rates for Friday October 23, 2020: A see-saw week in the markets this week, mostly in reaction to Capitol Hill and whether another stimulus package will come out before the elections. Mortgages have been under pressure to rise as economic news is relatively good for still having a significant amount of the economy under some type of restrictions. The end result is that we are flat from last Friday, barely. Next week should be pretty jittery with the election the following week.

Please note rates are for purchase transactions, refinance rates are higher, please call for quotes to meet your situation.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                            2.625%   Flat

30 year high-balance conforming                   2.875%    Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

I want to public thank everyone who responded to my WR&MU the last two weeks. Every two or four years I hesitate before writing about propositions and elections considering the impact of how some may take my comments. Thankfully I have a very sophisticated, intelligent and reasonable group of readers who understand that disagreements are important to democracies, that disagreeing with someone enables you to learn about an issue from a position you may not have considered and that respecting others points of view is critical.

My position is that I do not need you to agree with me, what I do need, or at least desire, is that you are comfortable with our disagreement and very importantly we strive to understand why we disagree and respect how we have come to our positions.

My thanks to all who respectfully disagree with understanding, and friendship.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

How will the elections impact mortgage rates and housing markets?

Question of the week:  What will happen to mortgages and real estate after the election?

 Answer:  The quadrennial question that has me grabbing the third rail of marketing, never discuss politics nor religion.

Disclaimer, I completely missed the answer to this question in October 2016. In the WR&MU I said that rates would be minimally impacted, rates climbed from 3.375% the week before the election to 4.00% in three weeks after the election. This was due to investors selling off bonds and mortgages to purchase equities causing stocks to soar.

As well, in October 2016 I indicated that whoever won the election they would have minimal impact on the economy that was headed to recession within four to six months after the inauguration. As you are aware, the economy continued to grow and add jobs until the Covid pandemic saw tens of millions of jobs lost and the economy dropping into recession for the first time since 2009.

So, you want to hear my thoughts again?

Quick background for those who have joined the WR&MU list since 2016. I have a Bachelor of Arts degree in Economics and Political Studies and have been active in continuing my education in both disciplines since receiving my degree in 1984. A bit of a news junkie and not afraid to be labeled an econ nerd, I have always read books, articles, columns, stories on economics and politics through history and modern times. Not trying suggest I am an expert; however, I have a pretty good breadth of knowledge of economics and politics and how they interact. Which enables me to be wrong about things but have sound reasoning for being wrong. I learned that in my economics 203 class when the professor taught about how to use “on the one hand…but on the other…” to hedge your bets when making predictions.

Interest rates and housing prices are primarily impacted by economic activity. Rates tend to increase during positive economic conditions and decline during negative economic conditions. The same is true of home prices and housing markets. At some point, a positive economy can result in rates that are high enough to choke of housing markets as rising prices and higher rates reduce affordability.

The question of the week is really, what impact with the election have on the economy?

Every four years the primary focus on election results is on the top of the ticket, who will be our President for the next four years. But equally important is down the ticket across the country and which party will control the Senate and which party will control the House of Representatives.

Since President Clintons first year in office, every President has had one year—their first year—with the majorities in both the House and Senate from his party.

For our election currently underway, the Democrats will most certainly retain the majority in the House; right now, there are 232 Democrat and the Republicans have197 Representatives. If the Republicans are able to gain 36 seats it will be the biggest possible surprise of the election.

In the Senate the Republicans have a majority by 53 seats to 45 for the Democrats, with two Independents who routinely vote with the Democrats. The Senate is in play and which way it goes will have a tremendous impact on expectations, depending on who wins the Presidency.

At the macro level there are two possibilities, if Biden wins and the Democrats flip the Senate majority the election results will fall in line with the last four Presidents having his party in the majority in both chambers of Congress. If either Trump wins or the Republicans retain the majority in the Senate, there will be at least one of the three branches in opposition and able to block legislation.

What do these possibilities mean for mortgage rates and housing markets?

Our Constitution purposefully established the checks and balances in the branches of government to prevent one party control. John Adams and James Madison, before they were Presidents, both cautioned about the “tyranny of the majority” to abuse the minority. These concerns resulted in our government being established as a republic and the bi-cameral legislature. Gridlock and stalemates are built into our Constitution, and investors tend to prefer them to one-party rule.

Generally, markets, meaning investors, prefer some form of gridlock and either the Executive, the Senate or the House in opposition to the other two. This is my preference as well.

If the Democrats win the White House and flip the Senate, investor and market reaction could be to be very cautious to take risks based on the comments and policies put forth during what I call the “rhetorical season,” also known as campaigning.

The expectations based on the campaign comments and statements is that should Biden have majorities in both houses that many of the regulations and policies put in place during Trump’s administration will be repealed and that the tax code revisions made in 2016 will also be repealed, pared back or otherwise changed. Essentially, in the view of the markets, turning federal policies away from what is considered to be a business friendly environment the last four years.

Should this action and reaction occur rates should remain low as investors retain their investments in safe holdings, such as bonds and mortgages, and the stability of housing markets will be determined by the overall economy and primarily jobs and wages.

The immediate aftermath of the election, in my opinion, will be a drop in equity markets, perhaps significantly. The reason I say this is because it is extremely likely that the results of the election will not be known for several weeks due to all the voting being done by mail and the number of states whose Constitutions prevent them from counting mail-in ballots until Election Day, or even after polls close. While the Presidential results may be known sooner, many House and Senate results may not be known for weeks, possible a month or longer. This is the type of chaos and uncertainty investors do not like and they will likely move out of equities to cash.

Mortgage rates are as low as they probably can go. Think about tying up your money for 30 years and have a rate of return less than 3% after fees are taken out along the way. Historically inflation is 3-4%, so for the majority of the time your money is invested you will be losing money to inflation. Regardless of the outcome in the elections there is greater opportunity for higher rates than lower rates.

There will be a lot of work to be done for whoever is inaugurated on January 20, 2011 to all the open seats in Washington. The period between the elections and the inauguration the President and opening of the 117th Congress will likely be very choppy and filled with uncertainty as results are tabulated and speculation abounds.

What happens after January 20th will determine the direction our political representatives want to control our economy through the powers they have for regulation and taxation. Reactions by investors and markets will show how they feel those policies and regulations will impact business, flow of funds and returns on investments—which will ultimately determine whether interest rates, and housing markets, go up or down.

Whoever wins and regardless of whether we have on party rule in Washington or a divided Executive and Congress, our economy will require careful consideration of governmental actions and their consequences as we try to rebuild following the damage caused by the pandemic shutdowns that have harmed small businesses and the entire entertainment and travel industries. Our economy is controlled by consumers, they account for 65-60% of our economy. A significant percentage of consumer spending is on services, which have been hard hit due to Covid-19. Long term our housing markets will depend on how well, and how quickly, these sectors can rebound in 2021.

Finally, key to the recovery and economic growth, even more important than who is sitting in the Oval Office and Congress, will be how quickly and widely a vaccine for C-19 is available. California, and several other states, appears to have shutdowns continue in many areas of the economy and public interaction until a vaccine is available—and possibly until a certain percentage of the population are inoculated.

Have a question? Ask me!

Consumer news positive, employment numbers not, were the take aways from this week’s economic data releases. Consumers pushed retail sales up for the fifth month in a row in September, with sales climbing 1.9% over August. The increase was led by more Americans dining out and getting to their favorite eateries in the new cars and trucks they purchased in September.

The increase in retail sales is positive news, but cautiously so as initial unemployment claims rose by 53,000 this week—a seven week high in new claims. The number is not fully accurate as to the number of filings as California has not updated its unemployment claims for three weeks due to a large backlog in cases, and duplicate and fraudulent claims. As well, California just started accepting new claims after a two-week period where it did not accept claims. The state has had about 30% of the total unemployment claims nationwide during the pandemic. Since California is also a major part of our nation’s GDP, and consumer spending, the lack of ability for unemployed workers to receive relief is putting increased pressure on the state’s economy.

Rates for Friday October 16, 2020: Rates dipped down as the week ended, moving for the first time in several weeks to match all-time lows first met in June. As you can see by the chart, rates have been in a tight 0.25% range for just over four months. It is a common belief that this is the bottom range as by the time mortgage payments flow through to investors the rate of return is about as low as investors will accept for tying up funds for a prolonged period.

Please note rates are for purchase transactions, refinance rates are higher, please call for quotes to meet your situation.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                            2.625%   Down 0.125%

30 year high-balance conforming                 2.875%    Down 0.125%

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Regarding party control in Washington D.C, and also state capitols, my desire is always for the parties to be divided between the Executive and Legislative branches, with neither party in control of both chambers and the Executive branch. I believe we need divide and opposition to temper the ambitions of politicians, to dampen the ability of the majority to tyrannize the minority. This leads to more stable economic conditions and enables a healthy housing market supported by stable employment markets. Essentially requiring both parties to move towards the center to find common ground to enact legislation.

Our 2020 election will reenact history from many decades ago when all ballots were hand counted and it would take weeks, months for results to be known. Unfortunately, unlike our ancestors, we as a society do not have the patience they had in waiting for results and communication. Our expectation is instant communication. Unfortunately, as any delays in results drag out the opportunity for unrest spurred on by social media and bad actors who desire chaos. I am sure I am not alone in hoping our nation is able to continue its life-long history of peace after elections, the exception being the election of 1860.

Stay calm, vote on.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog

10-9-20 We received our tax bill…

Question of the week:  We just received our property tax bill…

 Answer:  This is an annual Question of the Week that I send out in October, about the same time property owners should be receiving their property tax bills. As well, it is a natural follow up to my comments in the Weekly Rate & Market Update from last Friday in which I gave my thoughts on the propositions on the California ballot that impact real estate.

Yes, this is technically not a “question of the week,” but the start of the question. There are several phrases to make it a question I will quickly go through this week:

…why is it lower than you estimated when we purchased our home earlier this year?

…why is it higher than last year since we are under Proposition 13?

…how much should we pay?

…why is it lower than you estimated when we purchased our home earlier this year?

If your property tax bill is significantly less than my estimates when we funded the loan to purchase your home then you will very likely receive a supplemental tax bill, if you have not received one already. The two bills added together, the tax bill you have just received from the County where your property is located and the supplemental tax bill, should be close to the estimate we used when you purchased your home.

In California, the fiscal year is from July 1st to June 30th. The tax bill property owners will be receiving soon from their County Assessor has an option of paying half the bill by December 10th covering first half taxes from July 1st to December 31st and the other half by April 10th covering the second half taxes from January 1st to June 30th. The tax bill mailed in October is based on the prior tax bill as adjusted for Prop 13, or if there was a transfer the value on January 1st.

When you purchase a property the tax base for the property is adjusted based on your purchase price. Depending on when you purchased the property the new value may not be adjusted by the County Assessor before the tax rolls are set for the coming fiscal year. If this is the case the tax bill you have received reflects the prior assessed value plus and adjustments for Prop 13 (see below) or additional payments for taxes or bonds put in place by voters or local government. This is the primary reason your tax bill is probably lower than you anticipated, and why you will receive, or have received, a supplemental tax bill.

The supplemental tax bill covers the difference between the taxes on the tax bill and the taxes you should be paying from the date of the close of escrow on your property purchase to the end of the fiscal year, June 30th. Depending on the seller’s assessed value and your purchase price the supplemental bill can be very large, very small, or even “negative,” in which case you will receive a refund from the County.

Supplemental tax bills are only mailed a few times a year, so it may be some time after you closed your purchase before you receive your supplemental bill. Please note, if you have an impound account and your lender is collecting and paying your property taxes that your supplemental bill is not sent the supplemental tax bill, the payment is entirely your responsibility.

Confused? Let’s say you purchased a home for $650,000 and closed escrow on February 7th. Using our rule of thumb of your property taxes being 1.25% of the purchase price your annual taxes the first year of ownership should be $8,125 per year ($4062.50 for the first and second half tax bills). Your seller purchased the property in 2000 for $375,000 and their assessed value has risen through the years and their tax bill the year they sold the property was $5500. You just received your first property tax bill from your County Assessor and it shows you owe $5610 conveniently payable in two payments of $2805 each.

There is a difference in annual taxes between what you should be paying and what you are being billed of $2625. However, this will not be the amount of your supplemental tax bill as that is the annual property tax differential and you only owned the property since February 7th, not July 1st of the prior year. There are 143 days between February 7th and June 30th, and that is the period which the higher assessed value should be applied for property taxes. Therefore, your supplemental tax bill will be the annual property tax differential divided by 360 days multiplied by the number of days you owned the property between the sale date and end of the tax year:

$2625/360 = $7.29 per day x 143 days = $1042.71 as your supplemental bill.

Note that depending on your closing date you may receive more than one supplemental bill.

It can get pretty confusing, however most County Assessor websites have links where you can input your address, sales price and closing date and it will calculate your estimated supplemental tax bill.

…why is it higher than last year since we are under Proposition 13? Prop 13 was passed at the ballot box by California voters on June 6, 1978. There were three major items in the measure that immediately impacted property owners in 1978. First, it decreased assessed values by having all properties in California re-assessed to their assessed values in 1976. Second, it capped the assessed value of real property taxes to the state at 1% of the ad valorem value of the property, i.e. the transaction value. Third, it limited increases to assessed values to an inflation index but not to exceed two percent (2.00%) per year. So if your assessed value in 2019 was $400,000, the most your assessed value can be in 2020 is $408,000.

It is the third factor that confuses many new or experienced property owners when they receive their property tax bill that the total is higher than what they paid the year before. Since property values are increasing your assessed value is increasing as well, but not more than two percent above the assessed value from the prior year.

Also surprised are those property owners who do not follow the news or politics. Their surprises come in the form of special assessments put on tax bills by either voters or elected officials in the form of bonds or taxes. For instance, for our home in Long Beach we have nine such assessments that add 29% to our base tax rate of one-percent. Three of the assessments are local bonds for the Metro Water District, Long Beach Community College District and the Long Beach Unified School District; the other six are county measures and bonds for parks, flood control, sanitation, etcetera. Every city and county has different special assessments on their property tax bills that are added to the one-percent maximum taxable assessment from the state.

…how much should we pay? 

Before I answer here is the disclaimer: I am not a tax professional or accountant, before you make any decision as to how much you should pay in property taxes this year consult your tax preparer.

In December 2017, federal tax reform was enacted in Washington D.C. Part of the new tax act was capping the deduction for State And Local Taxes (SALT) to $10,000. This impacts residents and homeowners in several states, including California. Why bring this up? Some individuals or families may want to consider paying their first and second half property taxes in 2020 if they will not reach the $10,000 limit in SALT paid in 2020 and predict they may exceed it next year. Before making this decision consult with your tax preparer who can review your options and help you forecast next year’s income and possible tax liabilities for 2021.

Repeating my disclosure: I am not a tax professional. Before making any decisions regarding our taxes please consult with your tax preparer.

If you own property I strongly recommend you have two professionals assist you: a family law attorney to help you establish an estate plan with a trust and a professional tax preparer to ensure you are maximizing your tax opportunities as well as able to provide advice when needed.

If you have any questions on property taxes please do not hesitate to contact me and I will assist you the best I can.

If you, or someone you know, do not currently pay property taxes I am very willing and able to speak with you about how you can purchase property and become a homeowner!

Have a question? Ask me!

Rates for Friday October 9, 2020: Mortgage prices bounced around this week, as did equity markets, as Washington feuds over another stimulus package; how big should it be, what should be included, what is Covid related and what is make-the-base-happy related. The bouncing, for mortgage rates anyway, has been pretty tightly confined and we find our conforming rates this Friday flat for the seventy straight week, the longest streak since the ten straight weeks from October to December 2019.

Please note rates are for purchase transactions, refinance rates are higher, please call for quotes to meet your situation.

FIXED RATE MORTGAGES AT COST OF 1.25 POINTS LOCKED FOR 45 DAYS FOR PURCHASE TRANSACTIONS:

30 year conforming                                            2.75%      Flat

30 year high-balance conforming                      3.00%      Flat

Please note that these are base rates and adjustments may be added for condominiums, refinances, credit scores, loan to value, no impound account and period rate is locked. Rates are based on 20% down with 740 FICO score for purchase mortgages.

Who doesn’t like traditions? One I have been part of for the past four or five years has been a “Mad Men” type lunch with my friend Chris at Long Beach’s renowned 555 East American Steakhouse. Chris has been a client for quite some time. He is a high school teacher, mostly history and economics, and our friendship started with his inquiries after reading the WR&MU and emailing me economic questions and his theories. Being a teacher, he has weekdays free in the summer and one year he messaged me, “lunch next week?”

He suggested 555, and upon arriving I could not help but notice he had a martini glass filled almost to the brim in front of him. “Oh, we’re having that kind of lunch,” I said. Chris grinned and we began our meandering discussions on history, politics, economics, family, cocktails and meat.

Like many traditions, our BBL, as we have come to call it, was postponed this summer due to Covid and restaurant restrictions. Being traditionalists, with the ability to adapt, Chris and I are meeting for an early dinner this evening instead of our usual lunch. The food will be fantastic, the company and discussion more so. No doubt after about an hour we will both feel the points we are making are brilliant and after about ninety minutes musing someone should be recording our ground-breaking theories and observations.

Whatever your traditions are try your best to not let the pandemic interrupt them. Adapt, flex, be open to alterations, but try your best to continue the foundational intent of those traditions. With Halloween a few weeks away and Thanksgiving appearing on the horizon, flexibility and innovation will work in your favor to continue those traditions that mean a lot to your family, friends, and yourself.

Have a great week,

Dennis

Past Weekly Rate & Market Updates can be found on my blog page at my website www.DennisCSmith.com/my-blog