Home Values and Rising Home Mortgages Rates

Author: Eric Townsend

Over the last couple of years the interest rates on home loans have been at historic lows. In recent weeks we have seen those rates rapidly rise. Those considering selling or buying a home are left wondering how rising interest rates will affect the value of homes. Here is a brief synopsis of how these changes could affect the value of housing.

Home values reflect supply and demand. Increases in supply cause prices to drop while increased demand cause prices to increase. To understand the effect of interest rates we must first understand what supply and demand is.

Supply of homes come from those willing to sell property including private home owner through a regular sale or short sale, banks with foreclosed properties, and also from owners/investors waiting on the sidelines for the right price at which to sell. Of these sellers, short sales and foreclosed properties account for the bulk of sales.

Demand for homes come from the aggregate amount everyone in a market is willing to pay for that supply. This aggregate amount is based on wages, levels of employment, availability of credit and the interest rates associated with that credit, and society’s sentiment regarding the strength or weakness of the economy in general.

So today when we look at supply and demand there are a few things we notice right away. First, supply is remaining constant. We still have several months of inventory, but that inventory remains relatively constant. With a constant inventory that is not increasing the effect of supply on the market should be nominal. Second, demand is also relatively constant. Wages and levels of employment are not going up or down either and recent surveys of consumer sentiment about the economy are improving slightly. The one thing that is not remaining constant is interest rates.

With interest rates being the one factor affecting home prices we must look at how those interest rates change the demand curve. To show the effect of rising interest rates we will use the example of the average demand (D) who is looking to buy a home. Let’s assume that the amount D is able and willing to pay is $1,340/mth. At a 5% interest rate D can buy a $250,000 home. At a 6% interest rate D can buy a $223,000 home, which means the value of the home that he can afford is $27,000 less. This is roughly a 10% drop in the value of that home. If rates rose 2% and D bought a home at 7% interest he could only afford a $200,000 home, which is roughly a 20% drop in the value of that home.

So with everything remaining approximately constant we could expect home values to level off. Unfortunately, interest rates have begun increasing. Home mortgages are based on 10 year Treasury Bonds and the rates on those bonds having increased from a low of below 2.5% just a few months ago to over 3.3 % today. With these increases mortgages rates have also begun to climb. With many new buyers subject to these higher rates principle home values should decline inversely.

On a brighter note, the effect of these higher interest rates is not reflected in values for several months. So if you are selling a home now is the time.

If you have any questions or comments regarding this blog email us at blog@lauruslaw.com

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Issues with Short Sales

October 31, 2010
Author: Eric Townsend

Short sales are more prevalent than ever and many Americans are using them as an alternative to foreclosure. Negative equity home owners see a short sale as a way of limiting their liability. Unfortunately, this is a mistaken belief and acceptance of the short sale by the lenders does not necessarily mean all future litigation of the remaining debt is barred. In some circumstances not only can the lender go after the short seller after the short sale, but, depending on the circumstances, the judgment could be non-dischargeable through bankruptcy.

With a myriad of state and federal laws protecting home owners most residential short sales approved by lenders will result in no future liability, but will remain in several circumstances. Some of these liabilities are created by the lenders and are strictly unenforceable under California state law. Others liabilities were created at the time the short seller created the loan for the subject property. In these circumstances it is very important to understand when there are legitimate and illegitimate liabilities places on the short seller. Once the short seller understands the legal ramifications of completing a short sale only then should action be taken.

Without understanding the liabilities a short seller may be subject to, or to assume an illegitimate liability, it is easy to place a short seller in a position of liability that could have been mitigated with adequate legal advice. In some, but not all, cases lawyers can use simple strategies to help prevent the future liability of these short sellers.

A short sale done properly should operate as a settlement because in fact the short seller is helping the lender to procure the highest proceeds through a non-distressed sale. These actions are valuable to the lenders, and should be used for bargaining the removal of the short seller’s liability, but only a licensed attorney can explain and guide these short sellers to that result.

If you have any questions or comments regarding this blog, email us at blog@lauruslaw.com.