Correlation Between Housing Values, Mortgage Rates and Property Taxes
Market value is the most critical factor in any avenue of real estate; everything starts with market value and market values are always fluctuating. Understanding real estate equates to understanding how to determine market value, essentially know how to conduct your own appraisal. The irony is that appraisal is not generally known even among industry professionals. Appraisal is not hard, it is simple and the crucial element to all things in real estate. Whether you are buying a property, refinancing, reducing your property taxes, investing, etc. everything is in relation to market value and the funny thing is that real estate market values are always changing. Real Estate values are constantly changing so the key is: knowing appraisal and how market values are determined. When you know appraisal and how market values are determined you will have the tools needed to work with your financial institutions 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.
There is an inverse relationship between real estate market values and the interest rates. When real estate values are up normally the interest rates are down as opposed to when the real estate market is low the interest rates are high. During the 1990s the real estate market was down and the interest rates were in the double digits. I can recall when 11% was a great mortgage interest rate.
When the market values started increasing in 2001 and the interest rates steadily decreased as the real estate market continued to increase. 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. One way or another, the bank makes their money and this helps control inflation.
In housing markets like today, where the real estate prices are dropping and the interest rates are low because the Fed is trying to stimulate the economy in some way, inflation rises. The economy functions on a balance and when that balance is off it creates inflation. The banks would be healthier if they could charge more in interest on the money they are loaning out. This is one of the reasons for the mortgage crisis. Higher interest rates may actually stimulate spending indirectly by giving the banks more on their money, banks will be more willing to loan out more money.
Housing values and interest rates off set each other, so when they are both low it appears to be a good real estate market, and with all of the financial institutions that are going through bankruptcies and shut downs we are seeing the results. Something has to give and the lending institutions are suffering and as a result the we are suffering also because not as much money is being loaned out.
An inverse relationship with housing prices and interest rates begs the question: Is it better to buy in a high real estate market with low mortgage rates or a low housing 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 purchase a residence during a low housing market with a high interest rate then your principal balance is low and you can refinance when the interest rates go down. Your interest rate can change; your principal balance doesnt unless you modify your loan. Generally, speaking though 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 normally is your property taxes. The great news is that a low real estate market allows for a lower assessment which means lower property taxes. Whether you have purchased in a high real estate market or a low one you can make sure you are paying the least amount possible in property taxes! In almost every state assessments are tied to market values so educating yourself on appraisal and the property tax system will give you the most power 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.