Quick post this week. There are not signs of another bubble like the 2007-2008 situation… well, I can’t make guarantees… nobody can since then–but that’s not why I think there may be another little pop coming soon. Let’s go through the very simple progression of the following…
Monthly Payment Buying
Monthly Payment Buying
Buyers should be able to get a monthly budget amount from their lender. The days of “you’ve been approved for 250,000” are over. The lender needs to take into account not just the price of the home, but the taxes, homeowners insurance, homeowners association fees, and private mortgage insurance. All of these things go into your monthly payment. So, once you have a budget you can begin searching, and playing the mortgage calculator game. If you know the numbers that your lender used to calculate your monthly payment, then you can change them with any mortgage calculator to figure out what you can/cannot afford. Please read my post about how you can probably buy a home. I explain in detail how affordable home buying may be along with some of the details affecting monthly payments.
Just as in the scary times of old , pre-2008, many buyers are pushing the limits on what their lender has given them for an allotted monthly payment. Rightfully so, as a buyer you may want to get the nicest and biggest house that’s within budget, but some buyers are leaving no wiggle room within that budget for things that may change in the future–I believe their called “variables” (gasp!).
The market collapse of 2008 lead to drastic decreases in home values, as you probably know. Assessments were way behind the market for a couple of years as the market decreased. Homeowners knew their homes were not worth what they once were, yet the assessed value, which directly impacts the tax bill, was much higher than what the home was worth. These over-assessed homes caused a flood of property tax appeals, the majority successful; also, the assessors’ offices were catching up on this on their own as well. So until the “bottom” of the market crash took place, assessments were always a little behind… and they are still behind today. But, we’re not decreasing anymore– You may see where I’m going with this, but let’s talk about taxes for a sec…
Because you’ve already read the link above (READ IT!) you already know that property taxes have one of the biggest impacts on your monthly payment. This is a very large if not the largest piece of revenue a village receives from its residents, and the village has 2 ways they can affect this bill for their homeowners. 1. Assessed Value and 2. Tax rate. As a last-ditch effort some villages tried to recuperate some of their revenue when the assessed values were dropping by raising the tax rates; the rate increases were not as dramatic as the drop in assessments, and most homeowners didn’t notice because their tax bills were still decreasing; they weren’t decreasing as much as they would have if there wasn’t a rate increase. Nonetheless… this is what happened post 2008. Since you’re loving my talk about taxes and other exciting stuff soooo much right now, check out how to calculate your taxes here.
So, just a stupid recap: houses were worth a lot, and going up in value… then they weren’t, and were dropping in value. The assessments were behind, but still chasing the market down… as assessments dropped so did the property tax bills, and some villages increased the tax rates to offset the loss in revenue a little.
Now, the housing market prices in most places are almost at or above the prices of pre-2008 market crash. Due to all of the things that happened post 2008 as property values, assessments, and tax bills were decreasing, home owners that have purchased during that time may be driving straight into a wall. As the market is rebounding upward, you guessed it, assessments are behind, as usual. This time, because you read that last link (Common! Read ’em!) you know that since assessments are lower than true market value so are the taxes. Don’t count on homeowners raising a red flag with the village trying to correct their taxes this time– “Hello? Hey Village, can you increase my tax bill please? I’m not paying the appropriate amount of taxes because my home is assessed too low.” In your dreams Village!
I have been advising my buyers on the assessed value of the homes they’re looking to purchase as we shop. If it’s much lower than what homes are selling for, we need to budget for an increase in their taxes. There’s a small trick to this, I mention it in the sidenote below. I feel many buyers are drooling over a low tax bill but don’t realize that the house is undervalued; even worse, there may be a senior and/or senior freeze exemption that they won’t qualify for. And to add insult to injury, many buyers may be at the top of their budget when they buy the home, and won’t be able to afford the increase in the tax bill when the assessed value jumps up to true market value and/or the exemptions are gone.
***Sidenote: You’ll be asking for a tax bill pro-ration from the seller, since taxes are paid in arrears. 105%-110% is pretty common. However, if you know that the home is very under-assessed, you may be able to get a larger pro-ration from the seller. This weakens your offer, but most of the time not a deal breaker, and can give you a little bit of cushion in your escrow account, at least for the time the seller lived there prior to you taking ownership. It’s only one year of cushion so you still need to plan for the future!
Villages seem to be playing a little bit nice, for the time being. I’ve seen some corrections from 2015-2016 but they are not TRUE corrections. The assessed values went up, but not to the value of what the home sold for. And for any village that decided to increase their rates during the recession, we’ll see if they decide to lower the rates as the assessed values increase or not. If not, we could be looking at some astronomical tax bills in IL. Higher than what they already are. Now that you have fallen completely in love with me from my last 2 links… why not throw in a third: property taxes by suburb will tie the knot for you.
Moral of the story!? Prepare. Your real estate agent should be able to look up assessed values and prepare you for an increase in taxes or not. If they can’t then please connect with me and reach out if you would like me to represent you as your Realtor. I hope this helps you!
Thank you for reading! Comments and questions welcome!