Interest Rates:

Over the last several years low mortgage rates have been a huge factor driving the increase in home prices. On top of the low interest rates, lenders found creative ways to structure loans that made it easier for many people to get into larger houses. However, the reality is that those loan products are about to go through a difficult period and this next stage may be one of the most disruptive influences in the real estate market. Industry experts estimate that, in the coming 12 months, the interest rate on almost one half trillion dollars worth of currently low-payment mortgages will be reset. In some of these loans the payments could double.

This is a link to an article that ran in this Sunday's Chicago Tribune, "Helping the Borrower Survive `Reset' Shock". It seems the critical issue is how well informed are buyers about their loans and whether they are prepared to deal with the sudden increase in monthly mortgage payments.

We strongly recommend that our buyers work closely with a mortgage lender to get the right product for them. For our sellers we always review the financing component of an offer to purchase because this clause could "bust" a contract even if the Attorney and Inspector Review contingencies have been satisfied. At that juncture it can be potentially damaging to the marketability of the property to say, "Buyer's financing fell through".

Although we tell people that the real estate market in 2006 has been a return to a more traditional market, when viewed in the context of the last several years, it has been very difficult for both buyers and sellers. The cost of money is a real factor for buyers and, by extension, sellers. As rates crept up almost 40% since January 2005, the increase put pressure on pricing. Sellers found they couldn't simply add 8-10% to the value of a house and expect to get their price. Buyers began to find that the leverage of lower rates was simply not there; larger mortgage payments at the higher interest rates can result in a severe change in their lifestyle. So we are back to a traditional market - value is critical, pricing a house well is at a premium and buyers are more judicious about assuming larger monthly mortgage payments.

Take a look at the article and give us a call if you have any questions.