There are many factors that can lead to an increase in home values. One is the economy of an area. If you live in a town where a big employer moves in bringing in lots of jobs, chances are that the home prices will increase. It’s a simple matter of supply and demand.
The converse is also true. If the only factory in town closes and the jobs go with it, people will want to sell and there will be a glut of home on the market. This makes prices fall.
Another factor in housing prices is interest rates. When rates fall, more people can afford houses and the demand goes up. As interest rates go up, people find that they can’t afford to buy houses so demand goes down.
Adjustable rate mortgages (ARMs) have made housing markets more vulnerable to interest rate raises. When most people had fixed rate mortgages, a raise in interest rates didn’t affect their monthly payments. But after the initial low-interest period, an adjustable rate can increase again and again. The worst is home equity loans with adjustable rates that have no caps.
Some of the rising home prices can be account for by speculation. When investors believe that an area will have higher prices in a short time, they are willing to bid up prices. As prices go up, the real estate market looks like a good investment and more people bid up the prices. For example, Las Vegas had tremendous increases in housing prices in the last decade. Those gains were fueled by the booming economy.
Where, you might ask, is this all heading? Some economists are warning that a housing bubble has formed, meaning that house prices have increased too fast. When the bubble pops, housing prices could decrease.
One way to detect a speculation bubble is to compare rental prices against home prices. When there are lots of people betting that the real estate market will continue to increase they will buy up properties even if they can’t cover the mortgage by renting it out. They are assuming that they’ll be able to recoup any loses when they sell the house.
Another sign of a housing bubble is to compare salaries to housing prices. If the salaries won’t cover the mortgages, foreclosures will go up and the price of houses will decline.
Unlike the stock market, housing markets don’t fall precipitously. After all most people live in the houses they own and can’t sell and move away because the value is falling. But before you take on a hefty mortgage do your research. It might make sense to wait until the bubble bursts before you sign.
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