Understanding Realty
How Real Estate Drives the Interest Only Mortgage Market
The real estate market and the mortgage market are great friends;
they generally are seen hand in hand, wherever they may go! One
fuels the other’s ambitions. Never a truer statement has been made
and they (the real estate and the mortgage market) seem to feed off
each other, as they both have continued to grow over these last few
years.
If a potential buyer has the greater possibility of securing a
mortgage, the greater the opportunity to sell a home or buy a home
becomes; Whenever the opportunities increase for the buying and
selling of real estate, then the prices for real estate increase.
Can you clearly see the relationship now and how one drives the
other? As the mortgage market has expanded, and the possibilities
broadened, so have the prices of homes, the new home construction
market, as well as the commercial development of real estate.
The potential for problems exist when this all happens too
quickly, or when the growth in one area exceeds the average growth
rate of other areas. This is the case with the real estate market
and the interest only mortgage. Much of the growth in the mortgage
market has been with interest only loans. Many analysts put the
interest only segment of the mortgage market at almost 23%. That’s a
huge hunk of the entire mortgage market and this segment has been
responsible for most of the overall growth. It would also seem that
it has played a tremendous role in fueling real estate prices. Is
this a rollercoaster ride, waiting for the drop, if so, let’s hope
we’re all buckled in!
Let’s take a moment to look at the four areas that contribute to
this continued upward growth, and their impact on real estate.
The price of existing homes on the market is a pretty easy one to
figure out; if you have your home for sale, quite naturally it will
bring a comparable price to the other homes in your area. How does
this serve to drive real estate prices? This concept works with a
Domino effect, in that when one home increases in value, it also
affects the homes around it driving the price, further upward.
The new home construction market is heavily reliant on building
material prices to determine the building cost and the contractor's
profitability. If building construction is on the increase quite
naturally, the prices of building materials are on the increase;
when you have an optimistic and growing economy, you will have
increases in building material cost.
The other big drive in the real estate market comes from the
development of commercial property. In resort areas, particularly
the development of real estate property for commercial purposes
tends to quickly affect the surrounding areas real estate prices.
Many of today's commercial mortgages have reached loan limits well
over $1 million; in fact, some of the residential mortgage loans in
certain resort areas are approaching the have the million-dollar
mark.
Now, when you combine all of these contribute factors, a mortgage
market that is extremely optimistic with its lending capital, you
have the makings of a market segment, with the potential for a
bubble effect. What happens in a bubble effect economy? The bubble
continues to grow until it bursts. This is what many analysts and
economists fear: that too many consumers are betting the farm on a
continual, optimistic spurt of growth. What could cause our booming
economy to rupture? In reality, many conditions can contribute and
provide the needed catalyst.
Well, what if there is a continual increase in pricing but there
is generally a continual downward spiraling of the ride we’re on?
Well, if there should be a tremendous downward turn in the
investment market, if there is a continuing loss of jobs in this
country, or if there are any natural occurrences that lead to
disasters that are beyond governmental or company control, you could
see a possibility for disaster. Does that mean it will happen? No.
It just means that the potential exists. But in the defense of the
housing and real estate market, if you’re going to be risky, that’s
the place to be. It’s one of the safest risky businesses that exist.
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