How Real Estate Drives the Interest Only Mortgage Market. Helpful Things to Consider

Posted on August 8, 2009
Filed Under Mortgage | Leave a Comment

The real estate market and the mortgage market are great friends; they usually are seen hand in hand, anywhere 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 several years.

If a probable buyer has the greater possibility of securing a mortgage, the greater the chance to sell a home or acquire a home becomes; Whenever the opportunities increase for the buying and selling of real estate, then the prices for real estate increase. Can you plainly 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 fast, 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. A lot of analysts put the interest only segment of the mortgage market at almost 23%. That’s the colossal 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 fueling real estate prices. Is this a rollercoaster ride, waiting for the drop, if so, let’s hope we’re all buckled in!

Let’s take a minute to look at the four areas that contribute to this continued upward growth, and their effect on real estate.

The cost of accessible homes on the market is a pretty easy one to figure out; if you have your home for sale, rather naturally it will bring a comparable price to the other homes in your area. How does this serve to drive real estate prices? This model 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 fairly naturally, the prices of building materials are on the increase; when you get 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 progress of commercial property. In resort areas, especially the development of real estate property for commercial purposes tends to fast influence the surrounding areas real estate prices. A lot of today’s commercial mortgages have reached loan limits well over $1 million; in fact, some of the residential mortgage loans in particular resort areas are approaching the have the million-dollar mark.

Now, when you combine all of these contribute factors, a mortgage market that is very 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 a lot of analysts and economists worry about: that too many consumers are betting the farm on a continual, optimistic spurt of growth. What could cause our booming economy to rupture? Really, lots of conditions can contribute and provide the needed catalyst.

Well, what if there is a continual increase in pricing but there is normally a continual downward spiraling of the ride we’re on? Well, if there should be a incredible 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 likelihood for disaster. Does that mean it will happen? No. It just means that the potential exists. But in the defense 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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