Factors that influence real estate values:

• Interest Rates
• Income
• Insurance Rates
• Property Taxes
• Financing
• Supply
• Demand

Interest Rates:
A one percent change in the mortgage financing rate can change the value of real estate by as much as 10%

A $300,000 mortgage financed at 5% for 30 years costs 1610.46 (Principle and interest)

So a monthly mortgage payment of 1610.46 at 6% for 30 years gives you a mortgage of $268,611.22 or 10% less.

Income:
I think that is self explanatory, as the average income goes up the buyer can afford more of a mortgage payment. The opposite is true if income goes down or the cost of living increases faster then the median income.

Insurance:
A large increase in insurance premiums will take away mortgage buying power from the purchasers, like we have seen with waterfront properties. Now if by chance insurance premiums go down it would have the reverse effect… but don’t hold your breath.

Taxes:
Acts the same as insurance, increases in taxes reduce the mortgage buying power of a purchaser… again don’t hold your breath.

Financing:
Banks being more liberal with there lending policies will cause prices to increase, as with credit scores (which will bring more buyers into the market creating a higher demand) and qualifying ratios (which will allow buyers to borrow more with the same income). Both of these will cause property values to go up but with disastrous consequences.

The tightening of these policies will have the opposite effect, which the market is currently experiencing.

Supply:
An over supply of homes (which is considered when there is more then 6 months of inventory on the market) will allow buyers not to push their affordability and houses will flatten or depreciate.

Demand:
Will cause real estate to appreciate at healthy rates when it is caused any combination of the following: a stable or growing economy, affordable housing, increases in household income, favorable or stable interest rates and financing availability. Recently (2002 – 2006) we have witnessed demand increase by the lowering of lending standards with is un-healthy.

What causes a healthy appreciation of real estate values?

Healthy appreciation of real estate is really caused by 2 elements:

• Interest Rates
• Income

The price of the home is determined by what the buyer can afford!

Allowing the buyer to afford more by changing the qualifying ratios and lowering credit rating standards is not true appreciation of real estate values. These practices caused the un-healthy real estate appreciation that occurred between 2002 & 2006.