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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 fuelling real estate prices. Is this a roller coaster 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 spiralling 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 defence 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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