Correlation Between Housing Values, Mortgage Rates and Property Taxes
Real Estate starts with market value and market values are constantly fluctuating. Knowing how to conduct transactions in real estate equates to knowing how to determine market value, essentially understand how to do your own appraisal. The irony is that appraisal is not widely understood even with industry professionals. Appraisal is not difficult, it is not complex and the critical factor to everything in real estate. Whether you are acquiring a residence, refinancing, reducing your property taxes, investing, etc. everything correlates to market value and the funny thing is that real estate market values are constantly changing. Real Estate values are always changing so the key is: understanding appraisal and how market values are calculated. When you understand appraisal and how market values are determined you will have the tools needed to work with your banks on loans and your Assessor on property taxes. The California Little Black Book and the National Little Black Book walk you through the appraisal process step-by-step so that you understand how to determine your market value and this is a tool you can use over and over again. Once you have the tool, the Little Black Book, you can appraise an infinite number of homes.
Historically, there is an inverse relationship between real estate market values and the interest rates. When housing market values are up normally the interest rates are down and inversely when the real estate market is low the interest rates are up. In the 1990s the housing market was pretty low and the interest rates were in the double digits. I remember when 11% was a great mortgage interest rate.
Housing values started increasing in 2001 and the interest rates went down as the housing market continued to go up. What the banks make in principal they off set with lowering the interest rates and inversely when the market values are lower this is off set by increasing interest rates. The bank is always making their money one way or another and this helps control inflation.
Housing markets like the one today, where the real estate values are decreasing and the interest rates are low as a result of the Fed attempting to stimulate the economy, inflation rises. The economy operates on a balance and when that balance is disturbed it creates inflation. The banks may be healthier if they could get more in interest on the funds loaned out. This is one of the causes of the mortgage and housing crisis. Higher interest rates may stimulate spending indirectly by giving the banks more on their money, banks will be more willing to loan out money.
Housing values and mortgage interest rates off set each other, so when they are both low it appears to be a good housing market, and with all of the bank buyouts and shut downs we are seeing the results. Something has to give and the lending institutions are suffering and consequently the we are suffering also because not as much money is being loaned out for movement of our economy.
An inverse relationship with real estate values and interest rates begs the question: Is it better to buy in a high real estate market with low mortgage rates or a low real estate market with high mortgage rates? My personal opinion on this is that if you buy in a high market with low rates theres no where to go from there. Your interest rate is low and so it doesnt make sense to refinance and so you are stuck with that huge principal balance. However, if you buy a home during a low real estate market with a high mortgage rate then your principal balance is low and you can refinance when the interest rates go down. Your mortgage rate can change; your principal balance doesnt unless you modify your loan. Normally your principal balance is a constant and your interest rate is a variable.
The greatest cost you will have with your property is always your mortgage and the next highest cost generally is your assessment. The great news is that a low real estate market allows for a reduced assessment which means lower property taxes. Whether you have purchased in a high housing market or a low one you can ensure you are paying the least amount possible in property taxes! In almost every state assessments are linked to market values so educating yourself on appraisal and the property tax system will give you the most leverage in terms of lowering your property taxes. Education on how to understand market value is the key to every door relating to your home including lowering your property taxes (assessment).
About the Author: Valerie Faltas, Property Tax Expert has been involved in all facets of real estate for over ten years including assessments, appraisals, estates and trusts, investing and much more. She is a Certified Property Tax Appraiser, Licensed Residential Appraiser and a member of the International Association of Assessment Officers. As a real estate investor and advisor she is well versed in all aspects of real estate. To contact Valerie Faltas go to her website: www.propertytaxlittleblackbook.com.
Got something to say?