Ryan Haley Podcast: Increased Home Values, Insurance Costs & Maryland House Bill 107

In this podcast. Ryan Haley delves into some of the topics that he's been watching and having conversations with clients, affecting specifically the greater Ocean City and Maryland markets, and how we might see those effects play out as we move into 2024.

We've got a hot topic with a 47% increase in home values since 2021, which was the last time that our real estate tax assessments had come out.

Additionally, rising insurance costs have not just affected us here in the coastal towns, but it's affecting the entire country.

And then finally, specific to Maryland, House Bill 107, which certainly has impacted condominiums, cooperatives, and homeowners associations are the three items I want to discuss here today. We're going to go high level on these, and in future podcasts, we'll break them down further and maybe even bring in some guests to talk about each one in particular. But what I want to talk about first was the tax assessments in Ocean City.

As we all know, real estate values have gone up here over the last few years, and that's a great thing if you're already a homeowner, many of which who have owned for years or just in the last couple of years have experienced great increases when it comes to home values and great increases when it comes to home equity in those properties. 

So, what does that ultimately mean for taxes?

Well, most increased homeowners love to puff their chest a little bit and say, "Well, my property has gone up in value." But when it comes to getting their tax bill, they're not quite as confident. They're not as happy about that assessed value. So, the reason we're bringing this up at the beginning of the year, the new tax assessments came out for Ocean City, and the way Maryland works, every three years, properties are reassessed. And here in coastal Maryland, in Worcester County specifically, they divide the county into three unique zones. You've got the southern end of the county, then you've got the upper northern half of the county with everything except Ocean City, and then finally Ocean City is the last one that they evaluate that the tax assessors for the county go out and evaluate.

And it just so happened that this was the year for Ocean City. And as of January 1, the new tax assessments came out, and on average, they have increased by 47.7% since 2021. That's an increase of over $4 billion in real residential real estate values to Ocean City, which is phenomenal because it truly does show that our real estate values are strong and have increased.

Honestly, we've been undervalued for years in Ocean City, and to this day, if you look up and down the East Coast, it's very hard to find a more affordable mix when it comes to finding a property that's close to the beach that gives you great amenities at the price points that you would pay to purchase today.

And that being said, all the experts are expecting that real estate values are going to continue to rise over the course of the next five years, and many people are making revisions right now as we think that we're going to see, instead of just, you know, maybe 1% increases, a lot of people, including Zillow and others, are saying that we may now go to 2%, 3%, and the most bullish saying 5% increase in values in just the next year.

So, prices aren't coming down. A lot of this is fueled by the fact that we've had limited inventory, which has driven the values up. But what does that actually mean to your tax bill? So, if your tax assessment has gone up 47.7%, in some cases, I've seen, you know, people almost double their tax assessment, depending on when they purchased. At the current tax rate, that would mean that your taxes would go up on an annual basis. So, currently, in Ocean City, you are assessed at 45 cents per $100 of assessed value, plus we pay a county tax, and that's currently 84.5 cents on every $100 of assessed value. 

Now, the big question is going to be, what do the county and city officials do with the mill rate, with the percentage rate? Do they keep it where it is, which would give a huge influx of tax dollars? Or is it something that they may decline and/or reduce, while at the same time, since the assessment is up?

They might not reduce it all the way down to a flat number, which I don't anticipate that they would, but they could reduce it and still generate more tax revenue. That is what is yet to be seen.

Now, if you are a primary resident, resident owner in Ocean City, you are protected by the homestead credit, which puts a cap on the real estate taxes at 3%. In Ocean City, we have a 0% cap. So, in essence, if it's your primary residence, you are not going to see an increase in your taxes. The brunt of this is going to be felt by our second homeowners, and that is where it's yet to be seen.

What are we going to do with the mill rate? What's going to happen? All in all, I've also seen on the tax bills that it's not like next year your real estate taxes are going up 47%. It is a phased-in figure over the course of the next three years. So, certainly something to keep an eye on. The other thing is, as I mentioned, Ocean City is a true value up and down the East Coast when it comes to actual home values, but also it's a pretty good value all things considered, even from a tax standpoint. 

Now, our friends through the northern Delaware have the most advantageous tax structure, as their taxes are extremely low when it comes to real estate. But if you compare Ocean City to New Jersey, New York, up into New England and Virginia, in most cases, our taxes, in general, are still much less. So, that's topic number one, tax assessments in Ocean City going up 47.7% over the course of the last three years.

What's number two? Number two is insurance. So, this does not just affect us here in Ocean City; this is a national topic that we're hearing more and more about. And a lot of it actually took place in 2023, but we have seen insurance homeowners insurance rates double in some circumstances.

We've seen some insurance companies decide that they no longer want to insure coastal properties, so they're dropping people. And so, what does that mean to you as a buyer, as a homeowner? Well, if you're in a condo association, in that case, the increase in insurance premiums is going to be divided up among all of the owners within the condo association. So, you might feel a smaller pinch when it comes to that increased amount. And if you're a primary residence holder, or it's a single-family home, then you are certainly going to see that, depending on which carrier you go with, you're going to have higher homeowners insurance.

Now, why is this taking place? Well, number one, we have seen higher risk items and higher risk events throughout The United States, whether it be hurricanes, fires, or earthquakes, you know, these snowstorms, these places, or these events where insurance companies have had to pay out, um, claims has definitely increased the premiums for everybody. They've decided not to just focus on those areas, but they've spread it across all of the homeowners in the United States. Thus, we've seen premiums increase in other circumstances. It just comes down to the actual values of a structure, right? So, we all know that with inflation over the last few years, we have seen the cost of goods go up. So, the cost of supplies, the cost of materials has gone up.

And for a while there, we were seeing the cost of labor that was skyrocketing because it was difficult to find quality employees. So, all of those things together, along with a real estate market that has had low inventory, has increased the values of these properties. So, we've seen condominiums in Ocean City that have doubled and, in some circumstances, tripled the value of that structure what it would cost if they had to replace it during the last 3 years. That certainly adds to the premium as well.

So, increased values of the structure and then just events throughout the country have all combined to give us higher insurance premiums and that likely will affect us here in the near-term. But most people are expecting that with inflation easing, we should see those premiums not necessarily decrease but level out. With that, some condo associations and some homeowners associations have decided to get proactive by doing things that they can to their buildings to reduce the possibility of claims, i.e., making improvements. So, they're putting on roofs; they are working on waterproofing efforts to the outsides of the building to ensure that they do not have these circumstances that arise based on, uh, that could affect having to pay out a claim or make a claim to get a payout from insurance companies. So, that's the Maryland House Bill 107, the second topic that we're seeing here in Ocean City.

Then this next topic, which is something I'm having a conversation with my clients and potential new owners in the area just about every day, and that is in Maryland here, House Bill 107. 

House Bill 107 passed in October, so October 1st of 2022, and what that stated was that all condominium associations, cooperatives, and homeowners associations where the initial cost of the common elements and amenities exceeded a value of $10,000, that's for homeowners' association. If you have, you know, roads that you maintain or a playground, or pools, infrastructure like that for a homeowners association, if the initial cost of that exceeded $10,000, then you're lumped into this group, and you have to adhere to House Bill 107. And what it did is, it required these associations to have a reserve study done on the common elements and have that completed by October 1st of 2023.

A reserve study basically takes a look at the association and all of the components. So, your roof, your siding, your structure, your elevators, your parking lots, any amenities, and what is the life expectancy and the cost if you had to repair or replace those items? This reserve study that's required is typically done in conjunction with an engineer study that looks at the life expectancy of all of those components. And then they take those components and the life expectancy and they divide out what all of the costs would be to repair, replace those items and a schedule to do so. The key to this is that it requires the reserve account to be funded to pay for these items when they come up or when they need to be done. 

In Ocean City and I think throughout the entire state of Maryland, we're seeing some associations that have been very proactive. They've gone out and gotten this reserve study done. We've seen other associations that I talked to that say, "I'm not sure if we're exempt from this or if we need to do it. We're a small association." And the answer is they do need to do it based on House Bill 107, but there's no governing body.

There's nobody out there that says this has to be done and is checking on it. But what I would say is that the silver lining to this House Bill 107 ruling is I've seen many associations that are getting very proactive, and they're getting their reserve accounts in order, and they're truly looking at the health and the state of their buildings.

Now, from this, what this allows or requires is the governing body, the board for all of these associations has the ability to levy an increase in condo fees and or special assessments to fund the reserve study properly. And if this was the first reserve study done by one of these associations, it requires that the funding be in place within three fiscal years of the initial reserve study. So, we're kind of in that first year right now, and a lot of associations are having conversations as to how they're going to fund this. Are they going to put together a special assessment? Are they going to increase the dues for a period of time? Are they in great shape? And so, it's been very interesting to see how this has affected condo fees, especially at a time when we've seen increased insurance costs also affecting condo fees in Ocean City, and now we have an increase in the tax assessments as well.

Thus, just like inflation throughout the entire United States, we're seeing some of these costs of ownership go up. I ultimately believe, like I mentioned, the silver lining to all this is we've got really strong real estate values which are not going to be going down, which is great for the core structure of a community.

Number two, we are at a point where insurance costs hopefully will be leveling with easing of inflation. And then number three, our associations might have some near-term pain or some pain in the near-term as have to raise funds. But ultimately, within the next few years, the plan to maintain these buildings is going to be stronger than it's ever been. 

As a new homeowner or a buyer buying into one of these associations, you're going to be able to have confidence that the board is going to be proactive because they're required to by law to maintain the building, thus your asset, thus, I mean, the largest asset that many people own, their home, or their condo, is going to increase in value.

So, those are three hot topics that I would love to discuss further with you if you've got questions about any of these. we'd be happy to break them down and let you know what we're seeing on a day-to-day basis.

The interesting thing with House Bill 107, as mentioned, is that it has no effect on financing as of yet. We just had a lender in here yesterday, and we talked to them. And since Ocean City has so many condo associations and there's no governing body, there are a number of associations that have not yet gotten the reserve study done. Thus, the lenders, the good news is you can sell your property, you can buy the property, and the requirements of the House Bill have no effect on financing at all.

What lenders want to see per Fannie and Freddie guidelines is that there's at least 10% of the annual budget in the reserve fund at all times, and that there is a flow that shows that from the budget every year, the operating fund and/or condo fees, that at least 10% of the annual budget is flowing into the reserve study. That's truly what they're looking for.

And then, looking at the insurance to make sure that the buildings are properly insured. So, we've got some additional eyes in multiple areas. If you're getting financing, the lender's looking out for you. They are reviewing the financials and the insurance to make sure you're investing in a wise investment. And then, number two, you've got some government policy that's come into play that I think also will keep some more eyes on these associations to ensure that the buildings are maintained, which then ultimately increases property values in the long run. This is not the topic that everybody likes to talk about, but it's the stuff that we are chatting with our clients with and about on a daily basis. Any members of our team would be happy to discuss more of this with you. If you like this information, please share it with a friend.

If you know somebody else who's looking to buy or looking to sell and they've got questions, send them this, send them a copy of this podcast, or have them reach out to me, as I'd be happy to help in any way that I can. 

Next week, we'll have another guest back on here for you. But thank you again for tuning in to this week's edition of the podcast. We'll see you next time.

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