Professional explains why he's not too worried about his market
As remote working opportunities open up relocation opportunities for millions of Americans, low tax states are seeing an influx of people while high tax states are seeing net out-migration. This trend, which according to a redfin report has been ongoing for the last eight years at least, saw four people entering a low tax state for each person who left, while higher tax states saw 2.5 people leaving for every new entry.
But with low tax states like Florida, Montana and, to a lesser extent, Texas attracting buyers from across the country, where does that leave mortgage professionals in states with higher income and property taxes?
To find out, MPA spoke to John Donlon (pictured), co-founder of GoldCoast Mortgage in Beverly, Massachusetts. His state has long held a reputation as “Taxachusetts” with the 7th highest state income tax burden in the country, according to a Wallethub study. He explained that with remote work opening up new options for buyers, he has to navigate in a market where someone working in Massachusetts might rather move to a low-tax state like Florida, or even neighboring New Hampshire.
“We have a client who retired out of the Air Force and was moving from Colorado, and he had the choice of any state where he could relocate and buy a home. He chose New Hampshire because his retirement income wasn’t going to be taxed,” Donlon said. “He bypassed Mass. and went for New Hampshire because it’s a low-income tax state.”
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Donlon, who is licensed in New Hampshire and Maine, as well as Massachusetts, explained that even though New Hampshire has a higher property tax rate, his client was keen to move where his income wouldn’t be as taxed. Donlon and his team worked out that even with a higher property tax rate, his client would be saving money there.
While his multi-state licensing allows Donlon to secure deals that might not happen because of Massachusetts’ tax rate, he explained that a looming millionaire’s tax on an already high-income state could push more high earners away. He explained, though, that local knowledge can help secure deals thanks to variation in municipal tax rates and a crucial ballot measure.
That ballot measure is called Proposition 2 ½, it was enacted in 1980 and since then has prevented any city from raising their property tax rate by more than 2.5% without first obtaining the voters’ approval. What that’s meant is cities that either went bankrupt or needed to raise taxes to pay for new schools and amenities have been able to raise taxes with voters’ consent, while many others have kept their property tax rates low. Donlon explained that because of Proposition 2 ½ the tax rate per $1,000 is roughly $4 in Nantucket but $20 in Amesbury. He can use this knowledge of local administration and city variance to help guide his tax-averse borrowers to a city that suits them better.
A crucial part of dealing with clients like this, too, is explaining what they get with their tax rate. Young parents, for example, might see a tax rate in a city as onerous until they look at the quality of the local public schools. For the education their kids will receive there, they might be willing to pony up a little more in income tax. Donlon also works with his clients to develop long-term plans to manage their tax burden as they shift into retirement. Even after they’ve paid off their mortgage, the tax might be onerous for these clients as they move on to a fixed income. Donlon connects them with real estate professionals who can help them sell a piece of their property or tax professionals who can negotiate their tax rate down.
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Donlon doesn’t think that taxes alone will drive Massachusetts’ homebuyers to Florida, but taken with the anguish of shovelling snow in winter it may spark the beginning of a trend. He sees many buyers looking long term at initiatives like this millionaire’s tax, or even at local estate tax rates, and thinks they may move out-of-state based on those. Even if new freedom of movement does allow some people to move to lower tax states, though, Donlon is confident that new buyers can fill the gap knowing that even if it comes with a high tax rate, living in a state like Massachusetts is worth it.
As mortgage professionals in other high tax states like New York and California stare down similar prospects, Donlon said that they can safeguard their businesses by obtaining licenses in multiple states. Low-tax Nevada might be a perfect addition for a California based mortgage pro, as Florida or South Carolina might be for someone based in New York. Even as these markets should be preparing for a high to low tax relocation shift, Donlon is confident that the national housing market will find its equilibrium again.
“If taxes spike, I would think that the values would correct at some point in places like Boston or New York City,” Donlon said. “That’ll help make it more palatable for people paying heavy real estate or income tax bills. It may represent opportunity as those markets fill back in, you just always have to be looking for it. The downside velocity of these trends can be impressive, but not if you’re just peddling one product. You’ve got to look for other options, different types of clients, different styles of selling and different demographics.”