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Real Estate Yin-Yang - Interest Rates

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By : Anthony Flores    99 or more times read
It is interesting to think about. There are several different events and parts of the real estate market which contain an equal and opposite factor. For instance, communities with a mixture of nice homes and average homes balance each other out, with the nice homes becoming less valuable, and the average homes become more valuable. This sort of force is apparent in every aspect of our lives, and it is no different in the housing market.

One segment of the market that I would like to talk about in particular today is that of the mortgage industry. If you were to read any of my other articles, you would know that I am a firm believer in the fact that our road to economic recovery begins in the housing market, with the first step to be taken located in the mortgage industry. The Yin-Yang concept that I would like to talk about today is the mortgage rates and their ability to drive market activity.

First, I would like to state the obvious: the lower the interest rates are, the lower the monthly payment is going to be on a home. This will allow for more buyers to enter the market, and for more buyers to increase the price ceiling that they were working with in the beginning. Real estate demand centers around our ability to get people into a position to buy. The more people who buy, the more balanced the inventory/customer ratio becomes, causing prices to grow.

Here is the second part of the equation, or the Yang, if you will. By keeping interest rates low, we are effectively lowering the value of mortgage notes on the secondary market. People are going to be more apt to invest in mortgages the higher the rates are. We need to make sure that people buy these notes, so that lenders can continue to lend. "But that is what Freddie Mac and Fannie Mae are for, plus the FHA makes lenders more confident holding notes in their own portfolio." I hear you, but remember that there is always a force that is counteracting the Yin. The more money we have to pump into these government companies, the more we are going to have to be taxed, lowering our net income, and our overall ability to buy.

In closing, I believe that our ever changing, dynamically growing society will never fully be able to have a set of laws and regulations that work forever. Our leaders need to make sure that we are doing what is right, given the current state of affairs. As of right now, our government needs to focus on protecting the secondary market investor's interest, as well as moving more and more people into a position where they can buy property.

What if we lower down payments, and provide tax incentives to people who maintain a fully liquid account capable of financing five months worth of mortgage payments? The home owner keeps more money, the investor is protect (and investing), and the lender can make more loans without having to worry about forcing a large down payment that stretches the borrower out from the beginning anyway. This incentive can be in the form of a waived mortgage insurance, for instance. I think that lenders would be willing to lose make $200 less a month if it meant ensuring loans were going to remain current in the case of a hardship. This is just one of the many solutions that are available.
Anthony Flores is a real estate, investment, and mortgage consultant in Riverside Ca.

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