Why Are Home Prices Rising?

Statistics released this spring show that both new and existing home prices have risen significantly over the past twelve months. For example, the census bureau has indicated that the median price of a new home sold in April was $271,600, which was 8.3 percent higher than the previous month and 13.1 percent higher than one year ago. This is interesting news not only because it affects those in the market to purchase a home, but the economy in general. Wealth is created through rising home prices and this wealth has the potential to increase consumer confidence and thus consumer spending. Two questions arise from here--why are home prices rising and will they continue to do so? They are very interesting questions because just a few years back many were predicting that home prices would not recover for decades. In our opinion, it is also no coincidence that rates are rising at a time when home prices are rising and the real estate market gets stronger.

There are four reasons that home prices are increasing. For one, home prices dove down too low during the slump. In many areas the price of homes was below the replacement cost of purchasing a home. With so many foreclosures on the market, there was too much downward pressure on home prices. In addition, the cost of owning came in significantly below the cost of renting --especially when record low rates were factored into the equation. Investors across the nation recognized these economics and came in to purchase excess inventory to lessen the foreclosure issue and the equation quickly reversed. This caused the second reason for higher home prices--a tightening of inventory caused the price of homes being "bid up" in many cases. Across the nation, we have seen evidence of multiple bids on properties up for sale--especially at the lower or middle end of the market. This has created the opposite situation with regard to why home prices dove due to bank sales. In essence, reasons one and two have created a bounce in the market. The last two reasons? The economy and demographics. We will discuss these in part two of this series, as well as the future outlook for home prices.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com

What Do Higher Rates Mean?

I do not mean to beat a dead horse here; however the topic of higher interest rates seems to be dominating the headlines of the financial world. While these articles dissect the possible effects of higher rates on the stock markets, business performance and more, the question we would like to focus upon is -- how do higher rates affect the average individual? There is no doubt that these rates may make home and car financing more expensive -- but by how much? As of recently, rates have risen a little more than .50% from rock bottom record lows. What does one-half of one percent cost? Using a base of $100,000, this would raise the cost of owning a home by approximately $42.00 per month. If one were financing $300,000, then the additional cost would be $125 per month. These numbers are presented before the effect of taxes is taken into account. Most homeowners can deduct the cost of interest. In this case we will assume a tax bracket of 25%, which would lower the cost of the increase to around $94.00 per month.

Another effect of the higher payment would be qualification for the home loan. Lenders limit qualification to a certain amount of one's monthly income. That ratio will vary widely based upon the details of the transaction and type of loan -- amount of down payment, credit score, etc. However; assuming that the person is already at the "limits" of qualification, then the $125 per month would lower the qualification by approximately $25,000 of the total loan amount. This entire analysis is truly an oversimplification, yet it is important to analyze. Homes have been as affordable as they have ever been and a half-of-one percent change will not change that. Keep in mind that we still are not predicting the future of rates. Finally, what about car loans? The change in the cost of owning a car would be much, much less than owning a home. This is because car loans are much smaller than home loans, they are based upon shorter term rates which have not changed as much and are many times offered at discounts as low as 0% in new car promotions. The conclusion? At today's rates, purchasing a car or a home is still a bargain. But depending upon the future of rates, the bargain may not last forever.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com

Rising Rates -- Good News?

Several articles debating the effect of higher interest rates upon the economy have appeared in major periodicals in the past few weeks. The majority of them come to the conclusion that the recent rise in rates represents good news. Not because the higher rates will help the economy. But because of the fact that rates have risen because the economy is doing better. Or at least the threat of a double dip recession has faded from memory. One must remember that it was the threat of things going sour again which caused rates to dive down into uncharted waters. We accept this conclusion; however from this debate arise two additional questions. First, are Americans better off because rates have risen? Our answer is yes -- with a caveat. Americans who own a home and/or stocks are better off because these assets have gone up in value due to the better economy.

 

For Americans without a home, rising rates might make the recent bargains on real estate a distant memory. Which brings up the second question. Will rates continue to rise? At today's rates, home ownership is still a bargain and stocks are a much better place to invest as compared to yields on interest rate bearing instruments such as bank accounts. If rates continue to rise, this equation could change. We would have to predict the future to answer the question -- and we don't have that power. Friday's employment report showed 175,000 jobs created with a slight increase in the unemployment rate. This gives us not much of a clue as to the direction of rates because the report was "middle of the road." However, we will say that perspectives have changed significantly over the past three years. Three years ago, 175,000 jobs created would have been considered good news.

 

Mike Ervin

Senior Mortgage Banker

NMLS# 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com

 

Why Are Rates Rising -- Part Two

Several weeks ago I spoke about the reasons interest rates have been on an uptrend for the most part this year. The first thing I want to make clear is that the reasons have not changed. However, because we experienced a downtrend for a few weeks in the midst of the uptrend, there is reason for additional analysis in this regard. What were these reasons? There were basically three. Rates were bouncing back from ridiculously low levels reached at the end of last year when the economy slowed down and the budget crisis threatened to shut down the government completely. Secondly, the economy seemed to be bouncing back from the pause of late last year. Thirdly, the Federal Reserve Board was making noise about ending their purchases of Mortgage Backed Securities and an ending date for stimulus activity known as Quantitative Easing (QE).

The next question is--why did the rising trend stop? It appeared that the economy was not bouncing back from the pause as quickly as we thought. Weak data included the employment report for March and there was continued negative news from Europe and elsewhere overseas. Now, several weeks of rates drifting back down has been erased in a matter of days in the wake of a stronger employment report for April and continued strong data from the real estate markets. The additional perspective? For one, the employment reports are being watched closely and we have another report which will be released on Friday. Obviously, this report has the ability to turn the markets in either direction with a surprise in the data. Secondly, we can see that rates have become very volatile. Volatility is indicative of a market which has hit bottom. The conclusion? While we can't tell you where rates will go from here, all along we have indicated that record low rates would end and when they do, we will get no warning. My advice is this--don't focus where rates will go, but focus on where rates are. They are still historically low and if you want to borrow money to finance a house, car or business--now is the time to get it done.

Mike Ervin

Senior Mortgage Banker

NMLS # 282715

Office: 650-735-5261

Cell: 650-766-8500

mike@mikeervin.com