Written By: Toni Hedstrom, Principal Agent at Compass Florida, LLC
The real estate industry is in turmoil and is not just about interest rates.
Interest rates have doubled since 2020 and potential buyers are feeling the pinch. If rates were all they had to worry about, there might be a light at the end of the tunnel. Mix in outrageous insurance costs, utility costs, and drastically low home inventory, and it is pretty darn bleak.
Problem One: Low Inventory
You might think high interest rates are the problem, but they’re not. We will get to that later. For now, let’s talk about inventory. In 2020 home prices skyrocketed all over the country. This was partially due to a movement of the masses. The concept of working from home created a new reality: “Hey! I can live anywhere and still do my job.”
Florida, being a state with no state tax, incredible veteran benefits, and a reputation of being somewhat affordable, the masses came in droves. Florida homeowners who had no intention of selling found themselves unable to say no when faced with the opportunity to sell for 50k, 100k, or 150k more than they owed. It was time to sell the mansion and travel the country in an Airstream! Areas that would typically, over the past decade, have 300 or so listings on the market at any given time were reduced to 50 or 60 homes on the market. IT WAS A FRENZY!
Problem Two: High Interest Rates
Interest rates had been super low for a very long time. So long, in fact, that people had forgotten what the actual normal was. You see, prior to the economic collapse of 2008-2011, interest rates were about 6% as a norm. With 2% and 3% rates, we got spoiled. It is unlikely we will see low rates like that again. So, we need to get used to 6%. Consider this; rent is 100% interest!
The Quagmire: Prices Remain High
You are likely to stay put if you don’t have to move because of necessity. Where once, the average length of time a person stayed in a home was 3 to 5 years, now the average length of time is much longer. People are staying where they are to avoid giving up their low-interest rates for high-interest rates on a new mortgage for a new home. This means the housing inventory remains low, and when inventory is low, prices remain high.
The Trifecta
The third evil player in this game is holding costs, i.e., utilities and insurance. Everyone is astonished by the much higher electric bills today and the rising costs of insurance in Florida have many homeowners at risk of losing their homes.
All bad news. … Well, what if I had some good news to share?
The Good News: Portability
The Florida State Constitution was amended in 2008, bringing forth an incredible benefit for Florida homesteaded property owners. Most everyone knows about the Homestead Exemption, but there is an even more intriguing benefit – Portability.
What is Portability?
The Save Our Homes provision of the Florida Homestead Exemption amendment allows for a cap on the annual increase of a homesteaded property’s taxable value of 3% regardless of market value increase. For the sake of calculating portability, one must know their homestead’s market value and their homestead’s taxable value – two different values. The difference between the two values becomes your CAP VALUE. Your CAP VALUE is what becomes portable.
Portable means you take it with you to your new home.
For example:
If the market value is $275,000 and,
the taxable value is $218,000, then,
Subtract the taxable value from the market value and,
The CAP VALUE is $57,000 (the portable amount)
How is the Cap Value Portable?
Portability works in two ways: one way is if you purchase a more expensive home and another is if you purchase a less expensive home.
Portability to a More Expensive Home
If a qualifying Florida homeowner purchases a more expensive homestead (must be a homestead) within two years of relinquishing their prior homestead status, they can use the CAP VALUE from their previous homestead and apply it against the taxable value of the new homestead. Using the CAP VALUE from our last example, the formula looks like this:
New Home Market Value $550,000
Minus the Accrued CAP VALUE of $57,000 (from the prior example)
Minus the Standard Homestead Exemption of $50,000
You have a new taxable value of $393,000 on your new home.
Portability to a Less Expensive Home
If a qualifying Florida homeowner purchases a less expensive homestead within two years of relinquishing their prior homestead status, they can use a percentage of the CAP VALUE from the previous homestead property. Using our example home once again, the formula looks like this:
Divide the New Home Market Value by the Old Home Market Value
$175,000 New Home / $275,000 Old Home = 0.636
Multiply the resulting ratio against the old home’s taxable value to define the new home’s taxable value.
0.636 x $218,000 = $137,727
Minus the Standard Homestead Exemption of $50,000
Your New Taxable Value is just $88,727! WOW!
Toni Hedstrom, PA
Principal Agent
Compass Florida, LLC
License# SL3240813