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impact on mortgage products and higher rates for borrowers. Higher rates were expected in April 2010, when the 10-year bond hit 4.01.
But a turn of events delayed that, as the government’s buyer-incentive programs were discontinued.
What will increased rates do to home pricing?
Many articles have been written that expect the real-estate market in Orange County to experience a recovery. San Jose is expected to increase on the average price of $511,000 by 3% in 2011. Santa Ana is also expected to rebound 3% to $449,000. Another key local market forecast says San Diego will increase 2% above its $384,000 average.
Just so you understand, real estate companies in the past focus on San Diego as a barometer being that it is the first to bottom in recession and the first to recover from a crisis. Therefore, if San Diego recovers, the balance of Southern California should be just steps behind.
Why do I think inflation could be evident?
Because it is virtually impossible to correct the national housing crisis through continued years of short sales and other government made-up systems. The evidence is apparent by the last three months’ interest rates, the 10-year bond movement and forecasts that those who are still living in their homes, with mortgages higher than their values, to maintain their residences with hope that in three years their property may adjust above their deficits.
This would save the real estate market, create equity for those who are negative, and allow sales to go through without bank approval for reduced-loan values, therefore saving the banks from losses and the government from insurance of those losses.
In my opinion, it is the only way to correct this crisis and return jobs back into the economy through real estate-related activity. Therefore, inflation appears evident, and a way for both investors to gain from bond yields, and investors to buy real estate without the fear of deflation.
What does the interest do to pricing? Although I am comparing November with February, I should remind you of an article where I outlined that the bottom for buying real estate was October, when the 10-year bond was 2.33 and interest was about 4.25% for 30-year financing.
Given that date, the bond has spiked 127 basis points. Every 40 basis points equates to about 1/3% on mortgage rates. Since October, rates have increased about 1%. Since November that number equals slightly more than .05%.
As we gradually see rates rise, the value of leverage decreases as the payment increases. For every $100,000 borrowed, as interest rates increase by 1/8%, the value of the loan leverage decreases by $1,250 ($98,750).
Since November, that equals negative $5,000 for every $100,000 borrowed — or $95,000. In November, the same $500,000 loan at 4.5% is now in February at 5%, lowering the amount of home a purchaser could buy by $20,000 or the same payment for $480,000.
In November, a consumer could have financed a property at $500,000 and have the same payment as in February 2011. Therefore, in conclusion, if rates continue to rise, and prices are subject to inflation, if consumers do not watch the bond market and identify rising rates, their leverage will be impacted every time the rates go up, lowering their ability to leverage their purchase.
Now ask yourself if it is time to buy?
As always, consult with a professional real estate associate in your area to discuss your individual needs. These articles, I hope, explain that no matter when you decide to purchase, there are positives in every market that are not always the price.
The decision is to overcome fear and understand the impact from all aspects. Money is money, no matter how you spend it. So understand the ways to save and not focus primarily on price.
TOM IOVENITTI is the former president and chief operating officer of Coldwell Banker. He lives in Newport Beach.
