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DeepGreen introduces 30-year home equity loan

Jun 29, 2006

Appraiser's Perspective: Higher interest rates and property valuesCharlie W. Elliott Jr., MAI, SRAInterest rates,property appraisals Is it finally over? Is that real estate boom, which began years ago, beginning to wind down for sure this time? When compared to the stock market bottoming out a few years ago, how long will it take for the real estate market to finally hit bottom after a number of years of record sales? I will suggest that real estate cycles are much like our general economy, in that by design, they fluctuate up and down with the forces of the market. We never know when we have actually hit bottom until we have enough data to plot an historic trend. One thing is for sure—the market has remained resilient thus far. Given where we have been, there is plenty of room for a significant correction. Major cities in California, Florida and Nevada, to mention a few, have experienced annual appreciation exceeding 20 percent per year in recent years. Some have enjoyed gains averaging in excess of 20 percent per year in home values for the past five years. That being said, some areas such as Texas, Georgia and North Carolina have not experienced such rapid rate increases, reflecting only single digit increases. Many of these communities just barely reflect positive annual increases, reporting increases of around two or three percent per year. It seems that many of us who are dependant upon the industry have had our best years recently. So far, there have been few hard indications of a topping out of the market, as most indicators have been mixed. But deep down, we all know that as interest rates increase, property values will be squeezed. We hear a lot about our free economy and how prices are determined in our country by supply and demand. That is true, but only to a point. We all know that for many of the working years of our lives, a man by the name of Alan Greenspan has been behind the curtain, pushing the interest rate buttons. When interest rates started up a few months ago, there were those who predicted that a drop in property values would take place akin to an automobile falling off a cliff. So far, that has not happened; however, it should be noted that rates are likely to continue on an upward spiral for the near future, as the Federal Reserve shows no sign of loosening up. We can also credit Mr. Greenspan and his fellow board members for letting us down easy by raising the rates just a quarter of a point at a time, which has happened regularly over the past few months. Some say that we are perhaps likely to receive as many as eight additional quarterly increases, or about two whole points, over the next few months. Since the Fed bases its decision on the overall economy and not just the real estate market, can the real estate industry maintain its market position with such increases? Do we even know where we are? Are we at the edge of a steep rocky cliff, or are we just peeking over the top of a hill, looking at a smoothly paved, gradually sloping street? Now that we are here, wherever we are, most would agree that we are likely to experience a dip in market values due to these rate hikes. What circumstances and issues must we expect from those people whom we have a love/hate relationship with—the appraisers? Listed below are a few of the more obvious ones that come to mind. 1. When mortgage rates rise, property values level off or, in some cases, decline, especially after a sustained period of steady increases. Do not be surprised to see this happen, especially in some of your higher-priced markets mentioned above. In real estate, what goes up too high, too fast, must come down. You may hear statements, like, "I paid more than that for the property two years ago," "Property in this neighborhood has always gone up in value in the past. Let's get another appraisal," or, "It was appraised a year ago for more than that. Does this appraiser not know what he is doing?" 2. You probably have clients who seem to need to get a new mortgage every year or so in an attempt to extract equity from that one most important investment the average person has—his home. Here, we are talking about the people who spend more money than they earn. To stay afloat, they depend upon appreciation from the value of their homes. When the market tanks, many of these people will not be able to get a loan; that is, unless they switch to one of those 125 percent loan-to-value mortgages, and chances are that these types of borrowers maxed out in this regard the last time they refinanced. The appraiser probably cannot help you on this one. 3. What properties are the most likely to dip in value? Everything else being equal, the properties that increased the most in value in recent years are more likely to decrease under interest rate pressure. This is particularly the case where there is speculation driving up the prices of homes. An example would be a condominium building at the beach, where buyers consider themselves investors, hoping to flip the property at or before closing. These properties generally are rental properties, although some are second homes. If the economy tanks, rents will suffer, and that will not help. Second homes come with their own set of issues. Also, unlike other segments of our industry, the speculative property area tends to drop in price faster and could fall prey to the falling-off-the-cliff theory. Those listed above are only a few of the circumstances and issues that tend to crop up when interest rates squeeze property values. As an appraiser, my advice to the lending officer that is taking a loan application where property value decreases are suspected is to order the appraisal early on. This could save both time and money for the lender as well as the owner. Charlie W. Elliott Jr., MAI, SRA is president of Elliott & Company Appraisers, a national real estate appraisal company. He can be reached at (800) 854-5889, [email protected] or through the company's Web site at
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